The price-to-peak earnings multiple has increased to 12.6x after a cheerful holiday shortened trading week with generally encouraging macroeconomic data. It is not unusual for the stock market to advance in the week that contains Christmas, as a large portion professional traders leave for vacations and volume stays low. It is difficult for the boat to rock too much during such a lull in activity.
This week holds the final four trading sessions of 2008, and what a year it has been! The first two months of the year continued the slide in equities that had started in 2008, until the market finally reached capitulation. At that point, many investors were rightfully discouraged, but that all turned around when a memo from the Citigroup (C) CEO told his employees that the worst appears to be behind them and they may even make a profit. Evidence from other troubled financials began to back up the bullish trend and despite significant headwinds the market turned positive and has not looked back. Up to this week, the S&P 500 benchmark for US stocks has advanced nearly 25%. Still a far cry from where the market topped out in 2007, but certainly a more normal valuation than those days as well.
The percentage of NYSE stocks selling above their 30-week moving average has ticked-up again to 85%, which is considered extremely high from our point of view. This reading is an indication of an overbought market over the intermediate term (past 30 weeks), and generally we discourage placing more resources into the market when sentiment seems to be so decidedly bullish. Of course, no indicator of sentiment is always correct, and we have always held the belief that there are cheap stocks in any market. The sentiment index for individual investors (AAII) is currently divided right down the middle with 37.7% bullish as well as 37.7% bearish on the future returns of the market.
We would not be surprised to see a pullback in the market after more than 9-months of almost constant advances. Even a minor 5%-10% retreat would likely bring our sentiment indicator into more normal territory, and may in fact create a buying opportunity for long term value investors.
The end of the year is always a great time for reflection, but investors must always train their focus towards the future. At Ockham, the past year has been full of surprises and we are excited to get to work in 2010. We continue to believe that investors should remain in this market, albeit with less exposure to risk than your normal risk tolerance in a portfolio. The reason is simple: the market has come too far on questionable fundamental strength. We recognize that the economy is in much better shape than at this time one year ago. However, many of the problems that started the credit crisis in the first place have not been alleviated to our satisfaction; including foreclosures, consumer credit delinquency/joblessness, and corporate earnings are just beginning to recover. That is why we think that the market may be vulnerable to losses in the coming year. As we reported in last week’s EIG, all of the Wall Street strategists believe that the market will roar ahead in 2010, as Warren Buffett would say, “Be fearful when others are greedy. Be greedy when others are fearful.”
From all of us at Ockham, Happy New Year!
