Waiting For Expiration

My sense is that any upside from current levels will be retraced once we finally do get a correction, as sentiment is getting a bit frothy and we are overbought. The days after option expiration tend to be weak so I would not be surprised to see a correction early next week.

I want to take a step back and look at the intermediate term picture, making a list of both the positives and negatives:

The Positives

  • At Thanksgiving large investors were "de-risked". While sentiment has vastly improved it is unlikely that large investors have had enough time to position themselves aggressively as they tend to move slowly.

  • Retail investors are largely out of the market. All one has to do is look at the results of any of the online brokers. If they decide to come back they will be a new source of demand.

  • The Investors Intelligence survey still has about 30% bears. Intermediate term tops tend to occur when this number is closer to 20%

  • Seasonality is positive for the next few months. Seasonality has worked wonderfully for the past two years.

  • Corporations are repurchasing shares aggressively and there is a good deal of cash M&A.

  •  Valuations are reasonable as long as earnings come in anywhere near estimates.

The Negatives

  • Almost every sentiment survey and the anecdotal evidence I am seeing is showing excess bullishness. This is not generally a positive for forward returns.

  • The market is overbought on a short term basis and in about a week and a half will be overbought on an intermediate term basis.

  • The European economy is slowing and it is beginning to effect earnings.

  • A year ago the payroll tax deduction came into effect, which helped year over year comps for all of 2011 versus 2010. Starting now, this will no longer be a benefit.

  • Much of the stimulus from 2008 is rolling off and will soon be  a drag on comps.

  • The numerous imbalances and excess debt are still present. This has the potential to flare up at any point.


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Thursday links: pessimism fatigue | Abnormal Returns said...

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