Markets Headed Higher?

Client questions lately have revolved around the short-term condition of the market. We keep track of many “indicators” (fundamental, technical, sentiment) – we’ll touch on them collectively as a “Mosaic” (catchy given the firm name).

Market Climbs a Wall of Worry

Let's start with the sentiment picture; Ned Davis Research has one of my favorite Crowd Sentiment Poll. Remember, sentiment generally works in a contrarian fashion. When the majority of investors are extremely optimistic that's often spelled trouble for the stock market, and vice versa. Why? Sentiment is the “crowd” mentality – we don’t want to follow the crowd.

In March 2009 – sentiment was very pessimistic – setting us up for last years nice run.  Mid-January – sentiment had gotten too bullish. But my how things change, after a “normal” correction (5-7%) we’re already back into the pessimistic area again for sentiment. Again, the contrarian view is that the market “Climbs” this Wall of Worry.

Market's Breadth

On the subject of no market conviction, let’s talk about Market Breadth. Market breadth measures the relationship between stocks' new highs versus new lows.  Normally, the market experiences a marked deterioration in breadth before a major market top is formed. The lack of breadth deterioration this time suggests this has been a normal correction within a cyclical bull market. Technical, I know, but worth sharing.

Fundamental, Mr. Watson

We believe the global recovery remains on track as earnings have come in ahead of expectation (Low & HD just last couple days too) and inflation remains in check, for now.  So far, so good: The consensus has earnings up 30%-35% year-over-year in 2010, and on that basis valuation remains reasonable.

Conclusion

Earnings season came through pretty well; this leads us to believe the economic recovery story remains in tact.  Additionally, monetary conditions continue to be supportive of further gains.

Although we recently suffered a correction that approached 8%, it was still in the “normal” range; it was overdue; and helped ease some of the excessive optimism (too much of a good thing).

Finally, the “technical” indicators suggest a normal pause in a cyclical bull market.  Sentiment remains mixed, with market showing little conviction in either direction; meaning we could remain range-bound for a while.  We’re here to assist you in any way we can, give us a call.  We appreciate your Trust.