PreMarks {01.27.11}

Some thoughts as we end the week and close in on the end of the month.

Stocks are up nearly 5% for January.  Now I'll make the argument that stocks basically waited until January to achieve what should have been their 2011 fair value.  In other words if 2011 had thirteen months we would have been where we should have been at years end.  Having said that 5% is an awful lot in a very short period of time.  Annualized, markets are looking at a nearly 60% gain run rate for 2012.  That's probably not going to happen.

Stocks are very overbought by our shortest term readings.  Some other statistics that are short term negative.  Both the percentage of stocks that are trading above their 200, 50 and 40 day moving averages have now reached levels that have historically been troublesome for stocks advancing.  At the least stocks usually need a pause at these levels.  Investor sentiment has also shifted much more bullish in the past two weeks. 

Markets opened higher yesterday and then reversed pretty hard.  That's often not a good sign.  Earnings season has been mixed although much of this was probably already factored in.  Investors have also likely brushed off corporate cautiousness so far this year as that had been telegraphed in the past few months.

Stocks are showing a lower open today.  The official reason will be that the 4th quarter GDP print at +2.8% was below expectations of +3.0%.  However, it is the mix of those components that is likely the cause of the disappointment and not the slight miss.  Inventory accumulation accounted for a far greater contribution to the final number and final sales were up by only 0.8%.  That is the real reason that we're going to start the day lower. 

While news out of Europe has been mostly positive since we turned the calendar, the fact that there is no settlement to the Greek negotiations looks like it is starting to wear on investors over there.

The playbook says that it is prudent to play a bit more defense in the next few weeks as markets are showing every indication that they ready for a pause.  I still think that dips in the markets should be bought in 2012 because I think longer term on both a fundamental and valuation basis stocks are attractive.  However, nothing goes up in a straight line.  In terms of market direction, we'll wait and see what our indicators say in the days and weeks ahead.  Shorter term though these are flashing caution.