I thought one of
the more interesting correction predictions came from Gordon Scott via Tom
McLellan commentary. (“Top Soon” in the 28 Oct 2013 blog at…
http://navigatethestockmarket.blogspot.com/2013/10/stock-market-top-sooncompanies.html
)
Gordon Scott
noted that corrections frequently occur 1-year after a prior bottom as those
who have held stocks for a year can take profits and pay the associated taxes
at the long-term, capital-gains rate rather than the higher short term
rate. Since we had a 9% drop about a
year ago and the market has gone straight up since then, now would be
reasonable time for profit taking.
If a
small downtrend starts, we could also see some investors selling losers for tax
purposes. It is good tax strategy to
sell losers to offset capital gains. In
addition, there were concerns expressed by the CEO of Blackrock when he said
that many large pension funds need to rebalance portfolios.
Historically, we
are due for a “significant” pullback.
This bull market within the secular (long-term) bear market is much longer
than the norm. The average for a bull
within a secular bear is 26-months with a gain of 85%. So far, this bull has been 57-months long and
has gained 165% - thank you FED. There
are some who believe that since the old highs around 1560 have been taken out,
the market is now in a secular Bull market and the S&P 500 is headed to the
moon. Don’t bet on it. I’ll only subscribe to that view if all the
major indices significantly exceed prior highs.
The Nasdaq composite is 25% short of that target.
Carl Icahn’s
published concerns (I’ve posted below) won’t worry traders, but it may trouble
mom-and-pop investors.
So the stage may
be set for a “real” correction; but the FED may fool the markets again. My feeling is that if we see a correction, it will be in the 15% range soon with further trouble in 2014.
ICAHN WARNS OF ‘BIG DROP’ IN MARKETS DUE TO WEAK EARNINGS
(Reuters)
“Activist investor
Carl Icahn said on Monday he is "very
cautious" on the stock market, saying he could see a "big drop"
because earnings at many companies are fueled more by low borrowing costs
rather than the strength of management. Icahn's comments were blamed for knocking markets off record highs hit earlier in the day [on Monday].” Story at…
http://www.cnbc.com/id/101207991
S&P 500 IS
75% OVERVALUED (CNBC)
U.S. stocks are
grossly overpriced, according to asset management firm Grantham Mayo Van
Otterloo (GMO) & Company, which estimates fair value for the S&P 500 Index at 1,100 - or almost 40 percent below current levels…"Combining
the current P/E [price-to-earnings ratio] of over 19 for the S&P 500 and a
return on sales about 42 percent over the historical average, we would get an
estimate that the S&P 500 is approximately 75 percent overvalued," he
said.” Full story at…http://www.cnbc.com/id/101208851
FACTSET EARNINGS INSIGHT 11/15/13 (Excerpts from FactSet)
- With 92% of the companies in the S&P 500 reporting
actual results, the percentage of companies reporting earnings above estimates
is equal to the four-year average, while the percentage of companies reporting
revenue above estimates is below the four-year average.
- Overall, 460 companies have reported earnings to date
for the third quarter…In aggregate, companies are reporting earnings that are
1.8% above expectations…If 1.8% is the final surprise percentage for the
quarter, it will mark the lowest surprise percentage since Q4 2008 (-62%).
- In terms of revenues, 53% of companies have reported
actual sales above estimated sales and 47% have reported actual sales below
estimated sales. The percentage of companies beating sales estimates is above
the percentage recorded over the last four quarters (48%), but below the
average over the previous four years (59%).
http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_11.15.13/view
MARKET REPORT
Tuesday, the S&P was down 0.2% to 1788 (rounded).
VIX was up about
2% to 13.39.Tuesday, the S&P was down 0.2% to 1788 (rounded).
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing was 49% at
the close Tuesday. (A number below 50%
for the 10-day average is generally bad news for the market.)
New-highs outpaced new-lows Tuesday, leaving the spread
(new-hi minus new-low) at +37 (it was +255 Monday). The 10-day moving average of change in the
spread was minus -6. In other words over
the last 10-days, on average, the spread has decreased by 6 each day.
The 4-measures of Market Internals that I track for this
indicator were negative at the close today.
So this trend following indicator is negative.
Market Internals are a decent trend-following analysis of
current market action, but in 2013 (so far), if I had been buying the positive
ratings and selling negative ratings I would have under-performed a
buy-and-hold strategy.
NTSM ANALYSIS
Sentiment is EXTREME
negative at 74%-bulls for the 5-day indicator.
All other NTSM indicators are
neutral. Overall, NTSM is neutral. That is a broken record.
(I am mostly out of the market already.)
MY INVESTED POSITION (NO CHANGE)
I remain about 20% invested in stocks as of 5 March
(S&P 500 -1540). The NTSM system
sold at 1575 on 16 April. (This is just
another reminder that I should follow the NTSM analysis and not act emotionally
– I am under-performing my own system by about 2%!) I have no problems leaving 20% or 30%
invested. If the market is cut in half
(worst case) I’d only lose 10%-15% of my investments. It also hedges the bet if I am wrong since I
will have some invested if the market goes up.
No system is perfect.
I still lean toward getting back in, after a pullback, to
speculate on a final ride to the top.
NTSM did give several buy signals over the weeks of 14 and 21 Oct, but
the market just looks too frothy to rush back in…we’ll see if the market will
pullback so I can join the insanity. If
not, cash is fine.
