Market Pros and Cons

The Pros

  • Valuations are still reasonable. We are trading at about 13 times expected S&P 500 earnings for 2012.

  • Corporations continue to return cash to shareholders via repurchases and cash takeovers. While share repurchases have dropped off the level they were running at late last year, they are still at a level supportive of the market.

  • Corporate debt markets remain supportive of the market.

  • We still have nearly two months before seasonality turns negative ("Sell in May")

  • The market is nearing a short term oversold reading, albeit not a great one. How's that possible? The Russell 2000 is at a 1 month low. Most stocks have been declining, while the largest stocks have been rallying.

The Cons

  • Rydex traders are record long

  • Consensus bullish sentiment is 77%. That's about as high as that reading ever gets.

  • Market Vane bullish consensus is at 67%, which is about as high as it has gotten post 2008.

  • Corporate profit margins are at a record. It will be difficult for corporations to continue growing earnings more than revenue.

  • The excess debt that has caused several accidents and near accidents in recent years is still present.

  • Insiders have been selling aggressively and there has been a pickup in secondaries.

There are times when I lose money and I know that I made a mistake. Those are the toughest losses to deal with and the ones that linger in my memory. There are other times when I lose money and am able to look back and say that I would do everything the same way, given the facts at the time. When deciding on taking on an individual stock position or taking market risk I ask myself a question. If I end up losing money on this trade, will I look back and regret the decision.

If the market were to correct by 5%, or worse, if one of the many global imbalances were to creep up and cause a larger drop, would I look back and kick myself for taking a lot of market risk right now? The answer is yes. So many sentiment indicators are at dangerous levels after a 28% rally that it would be impossible to look back and say the warning signs were not there. Hence, I am pretty certain that I don't want to take  a lot of market risk right now. At the same time the bull case is not completely without merit, so I do not see a case for a short position. I continue to wait with little market exposure for better opportunities.


Eric Hilf said...

Bespoke says:
Still More Bears Than Bulls

Tsachy Mishal said...

I am curious to see the history of the Bespoke data to see if it has indeed been a contrary indicator? The data I have cited has a long history and has indeed been a contrary indicator at the extremes.

Anecdotally, it doesnt seem people are positioned very bearishly. Even people who are cautious like myself dare not go short.

OriginalChaos said...

Another important negative, I believe, is that the Fed has just recently telegraphed that there will likely be no more stimulus. That's like taking the crack from the addict. I'm surprised it hasn't beeen much of a topic in the media.

What is there to say? :-) | FMTrading Blog said...

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Tsachy Mishal said...

I would have been shocked if we saw QEIII now with the market up so much and the economic numbers coming in ok. I always assumed we needed to see weakness before we would see QEIII. Is QEIII off the table or is QEIII off the table until needed?

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