Despite the continued rise in the market I still see little reason to be bearish although I remain cautious. Technology stocks that are missing estimates than are going by over 5% in many cases. The AAII bulls are at the lowest level since August 2010 and the market is not yet overbought.
I am reluctant to turn bearish before the market is overbought, which is still about a week away . Today is only the fifth day of the rally and it typically takes ten trading days for a rally to exhaust itself. Typically we see a rally, a pullback and another rally so its possible that we are setting up for a short term pullback.
From a fundamental standpoint earnings are coming in weak but they are not falling off of a cliff. At the current modest valuations the market can absorb slight reductions to estimates. The bears will argue that earnings are a lagging indicator and are set to go lower. The bulls will argue that there are few excesses in the economy and corporations are lean which should lead to more of the muddle through we have been seeing for years.
I see the merit in both the bull and bear argument and am indecisive. I see opportunity in specific stocks and sectors. For instance the HMOs are a defensive sector that are not economically sensitive. Most defensive stocks have gone up a lot but the HMOS have done the opposite. Aetna and Wellpoint, which I own, trade at 7 times next years expected earnings.
UnitedHealth reported this morning showing that health care utilization rates remain low, which is good for the bottom lines of the HMOs. Mitt Romney is now leading in some polls. I believe there is a free embeded call option in these stocks if Romney wins. Even if Romney does not repeal Obamacare he is likely to make it less onerous on the HMOs. If Obamacare moves forward i believe a worst case scenario is already priced into these stocks.