The Steady Climb Higher Should Continue
January 15th, 2011 | 
Author: The market continues to push steadily higher on positive sentiment. We are now in earnings season and it will be interesting to note whether we get confirmation on the bullish outlook from the collective forward guidance. January is looking quite strong and is consistent with historic seasonal tendancies for the 3rd year of a Presidential term. From a technical perspective, until the indexes break the recent trend line and the 20 simple moving average and does so on volume, I see no reason to change my bullish stance. It is always a good thing to be hedged with a contingency exit plan in place.
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A Buffett Rule of Thumb
I recently read an article from Dan Ferris and he had some interesting statistics about the current valuation of the stock market.
From a contrarian point of view, excessive optimism and speculation produces excessive, dangerous valuations. If you were to measure the valuation of current market based upon price/earnings (P/E) ratios, dividend yields, and the ratio of the stock market to GDP. All three point to excessive valuation of the overwhelming majority of stocks.
The U.S. stock market is trading at around 18 times earnings. That means the average U.S. stock portfolio bought today might double your money in 18 years. Stocks are yielding about 1.85%. Dividends on a basket of U.S. stocks bought today will pay back your initial investment in 54 years.
He also uses on of Warren Buffett’s favorite indicators. The U.S.’s GDP is about $14.75 trillion. The Wilshire 5000 index contains about 98% of U.S. stocks by market cap. If you add the missing 2% to the Wilshire, the U.S. market is worth about $14.9 trillion.
So the U.S. stock market is now priced higher than the entire output of the U.S. economy. That’s like saying the entire U.S. economy consists of nothing but a few thousand publicly traded companies. Stocks aren’t truly undervalued until the market is around 80%-85% of GDP. At 100%-plus, they’re absurdly expensive.
Bermuda Triangle Economy
Are we at the tail end of the biggest dead cat bounce in decades?
There sure is a lot of bullishness out there for a market that has been essentially sideways for 2010. Are we at the tail end of the biggest dead cat bounce in decades or is the new normal of massive deficit spending, criminal government policies, and bankrupt state and local government the way to prosperity?
Well, the market has been on a tear since late 2009. More than a few have been against the recovery and lost. Those with a buy and hold/hope strategy has worked just fine….. provided you didn’t make that investment between the late 90’s and the end of 2008.
How long will this recovery continue? Does the relentless decline in the dollar point to a continuing increase in stock prices and your best strategy is to buy on the dips?
The most hard fought lesson that traders learn is to “trade what you see”. If the market is moving up….buy it, but have a plan for selling. If the market is moving down…short it, but have a plan for buying. It’s a trader’s market.
We are in the Bermuda Triangle economy. Good news is bad news and bad news is good. Your broker, Cramer, CNBC, and your government all have an agenda. It’s not necessarily for you to prosper.
Trade what you see…..and have a plan for the reversal.
We Will Re-test Support and Bounce
We have begun to roll over a little bit as I anticipated would happen as pointed out in last week’s analysis. I look for trend line support and then support from the 20SMA on all three indexes. I feel that the retracement will be small and we will bounce and continue higher
Time To Shine
I had predicted a lazy bullish move into the final weeks and days of 2010 and that is what we got. We are poised to pull back and test the 20 SMA and prior resistance which has become new support. I feel that we will test and bounce and we will end the month of January in bullish fashion. There are a lot of reasons to feel bullish for 2011. We are in the 3rd year of the Presidential Cycle which is a seasonal tendancy that has performed at a high level. There is recent evidence of outflows from the bond market and back into the stock market and I feel that trend will continue so get ready to make some money on the top side of the market. Dust off your watchlist and get your Long Picks ready for action.”
Put Up Better Numbers In 2011
As predicted we are moving sideways to slightly bullish and I feel that we will continue have more of the same through the end of the year. Look for reduced participation as measured by volume as traders take some time off for the holiday season. It is time to assess the trading year and make plans for next year. If you don’t have a trading plan, I would encourage you to do that. After all, this is a business and we should treat it as such. If you’re not sure where to begin, start by clicking here.
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