Where We've Been
Today I want to review what has been our principle investment thesis. We laid out our thoughts in a series of posts that we ran from December through January on the market's valuation. The series was named "Are Stocks Cheap?" You can link here if you want to see a table of contents with links to those various articles. In Part I we started by discussing our two basic questions:
1. What is the status of the economy? {Improving, stagnant, declining}.
2. What are the end of year earnings projections of the S&P 500?
Being able to answer these two questions gives us a frame of reference for the current market we find ourselves in.
In Part II we used that framework to lay our our rationale for our price targets for year end 2011. We took a look at different earnings estimate numbers from economist and applied standard PE analysis to them. Among other things we said, ".... fair value for next year {2011} on the S&P 500 has the potential to be somewhere in the range of 1,250 {roughly 13.5 times a $93 S&P earnings estimate} and 1,450 {a bit more than 15 times that $96 S&P number}. I will use as a starting point for next year at this time of 1,375 by year end. That is halfway between my own internal 2011 fair value estimate of 1,350 and 1,400. This is a PE of roughly 14.5 times a midpoint estimate of 94.50. I think these numbers have the possibility of moving higher as the new year unfolds...."
The first part of this series was devoted to what could go right. We also tried to balance out the positives by discussing the inherent risk of market volatility in Part IV. There we went into a brief description of what happens at market tops or at points of market saturation.
"Typically what happens is that at some point stocks become over bought enough that the supply of buyers is exhausted. Stocks fall under their own weight when that happens. This is true in bull markets as well as bearish trading periods. Statistically stocks are most prone to sell offs in between March and October of the year." We ended that article by noting that stocks were overbought by many of the metrics we use to measure such things. This was particularly true in the shortest time frames we measure.
We first became concerned about the short term posture of the market back on December 15th when we changed our shortest time period market reading to NET MARKET NEGATIVE. You can click here for a definition of that term. Basically we changed that rating to reflect that on balance in the shortest time frame we follow, for some of our more aggressive investment strategies and our more aggressive portfolio strategies we were net sellers of stocks. That simply means that on balance we have sold more securities than we have bought. We reiterated that stance on January 17th. While the market moved higher after we both of these events, at their lows on March 16, the S&P had only advanced a bit over 1% from that mid-December post and was down over 3% from our January reiteration.
To reflect certain actions taken in client portfolios we reported to you that we had changed our shortest term stance back to NET Market Positive in a post dated March 16th. Please also note that these readings only reflect our shortest term view of these things. Nothing that we have seen so far changes our believe that we are in a longer term secular bull market or changes our belief that stocks have the potential to be higher in the next 12-18 months.
We were active towards the end of last week, buying financial and dividend oriented ETFs and executing short term plans in our most aggressive investment strategy. We also made certain purchases in some under invested accounts. Irrespective of what we transacted last week, I think think that the market has been trying to send us a message about what we can expect in the next several months. Tomorrow I'll discuss what I believe stocks are trying to tell us.
*Long ETFs related to the S&P 500 in client and personal accounts.
In Part II we used that framework to lay our our rationale for our price targets for year end 2011. We took a look at different earnings estimate numbers from economist and applied standard PE analysis to them. Among other things we said, ".... fair value for next year {2011} on the S&P 500 has the potential to be somewhere in the range of 1,250 {roughly 13.5 times a $93 S&P earnings estimate} and 1,450 {a bit more than 15 times that $96 S&P number}. I will use as a starting point for next year at this time of 1,375 by year end. That is halfway between my own internal 2011 fair value estimate of 1,350 and 1,400. This is a PE of roughly 14.5 times a midpoint estimate of 94.50. I think these numbers have the possibility of moving higher as the new year unfolds...."
The first part of this series was devoted to what could go right. We also tried to balance out the positives by discussing the inherent risk of market volatility in Part IV. There we went into a brief description of what happens at market tops or at points of market saturation.
"Typically what happens is that at some point stocks become over bought enough that the supply of buyers is exhausted. Stocks fall under their own weight when that happens. This is true in bull markets as well as bearish trading periods. Statistically stocks are most prone to sell offs in between March and October of the year." We ended that article by noting that stocks were overbought by many of the metrics we use to measure such things. This was particularly true in the shortest time frames we measure.
We first became concerned about the short term posture of the market back on December 15th when we changed our shortest time period market reading to NET MARKET NEGATIVE. You can click here for a definition of that term. Basically we changed that rating to reflect that on balance in the shortest time frame we follow, for some of our more aggressive investment strategies and our more aggressive portfolio strategies we were net sellers of stocks. That simply means that on balance we have sold more securities than we have bought. We reiterated that stance on January 17th. While the market moved higher after we both of these events, at their lows on March 16, the S&P had only advanced a bit over 1% from that mid-December post and was down over 3% from our January reiteration.
To reflect certain actions taken in client portfolios we reported to you that we had changed our shortest term stance back to NET Market Positive in a post dated March 16th. Please also note that these readings only reflect our shortest term view of these things. Nothing that we have seen so far changes our believe that we are in a longer term secular bull market or changes our belief that stocks have the potential to be higher in the next 12-18 months.
We were active towards the end of last week, buying financial and dividend oriented ETFs and executing short term plans in our most aggressive investment strategy. We also made certain purchases in some under invested accounts. Irrespective of what we transacted last week, I think think that the market has been trying to send us a message about what we can expect in the next several months. Tomorrow I'll discuss what I believe stocks are trying to tell us.
*Long ETFs related to the S&P 500 in client and personal accounts.
posted by CR English at 2:35 PM
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