I Don't Like It But I Respect it

The best thing the market has going for it is that the S&P 500 is up about 10% for the year and hedge fund managers are drastically underperforming. The cost of further underperformance is high and is causing severe performance anxiety. Most surveys  and anecdotal evidence points to market participants positioned somewhat conservatively, with room to add market exposure. While I do not like the fundamental case for the market I would not bet against the market until sentiment turns more bullish.

One of the biggest positives supporting the market in the past year has been share repurchases. Last summer when everybody was preparing for another 2008 companies were repurchasing shares at a record pace. This has now changed as TrimTabs reports that announced share repurchases are at very low levels. Furthermore, insider selling has picked up in the past week. These are big headwinds if they continue.

The S&P 500 is nearing 14 times forward earnings with a deteriorating economic and earnings outlook. It is difficult for me to be bullish under these conditions. Unfortunately, valuation is a bad short term timing tool and performance anxiety may continue to dictate direction.

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