CI Outlook - Archives

May 2013

 

We are in a primary bull market.  The signals are clear yet no one wants to believe them.  While the Dow Transport Averages confirm the all-time highs CNBC’s talking heads continue repeating the mantra “sell in May and go away”.  The retail investor continues to hate stocks.  Last week $600 million flowed out of stock funds while $5.8 billion flowed into bond funds.  Despite sequestration, the Boston bombing, Middle Eastern tensions and a host of other problems, the market continues climbing a wall of worry.  But the naysayers will not give in.  Their latest argument is the existence of an “impenetrable triple top” in the S&P 500 Index.  They view the highs of 2000 and 2007 as proof that the current level must be at its top.  We think they are suffering from anchoring bias.  We believe the data below explains the fundamental reason why they are wrong and we remain long term bullish.

 

YEAR

S&P HIGH

S&P EARNINGS

S&P P/E

2000

1553

$56.00

27

2007

1576

$82.00

19

2013

1613

$110.00 est.

14.5

 

It is true the S&P is back to levels only seen at past market highs.  But earnings continue to rise, doubling since 2000.  The resulting below average P/E’s combined with growing dividends and inordinately low interest rates make a compelling case for higher stock prices. 

The technical case for the market is also strong.  Last December we sighted the possibility of a Dow Theory buy signal.  It was confirmed with new highs in January and it made a short term top in early March.  All through March and April the bears continued to stress the lack of new highs in the Dow Transports and the lack of participation by Russell 2000 small cap index as reasons to sell.  Yesterday those two lagging indices set new all- time highs.  This puts the fundamental and technical case for the market firmly in sync and signals an all clear for the primary uptrend.

At this stage it would be easy to throw caution to the wind.  But that is not our style.  We intend to stay invested and continue to seek out unexploited areas in the market where opportunity still exists.  However we know that no market goes straight up.  Prices are becoming extended and we would not be surprised by another short term correction or consolidation in the near future.  With that in mind we will retain some cash on the sidelines in order to take advantage of short term opportunities as they arise.


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