The price-to-peak earnings multiple remained unchanged as of Friday’s close at 12.2x. Stock investors were thrilled to see May 2010 pass into history, since the S&P 500 fell more than eight percent during the month—its worst monthly showing since 1940. So far this year, the old adage “sell in May and go away” appears to be sage advice. Looking ahead, we would not be surprised to see further downside in equities given the lack of certainty regarding the sovereign debt crisis in Europe. In addition, BP’s failure to stem the catastrophic oil leak in the Gulf of Mexico makes it likely that any sort of quick fix is now a remote possibility and there will be mounting political pressure on the entire domestic oil drilling industry which could prove very inflationary to energy prices in the months and years ahead. As the worst oil spill in US history continues to spew forth on an hourly basis, the increasing environmental and economic damage will be materially quite negative to the entire US economy.
Economically, fundamentals have clearly improved but we believe much of that improvement was priced-in during the market’s recent, rapid ascension. The current correction does improve market valuations, but comes at a very volatile and uncertain time. We consistently advised taking profits during the spring, but are not yet ready to give the “all clear” to re-deploy money into the equity market despite the more attractive valuations.
The percentage of NYSE stocks selling above their 30-week moving average was 41% as of last week’s close. As we mentioned earlier, investor sentiment is being negatively impacted by news out of Europe and the Gulf of Mexico; both of which seems only to be worsening. Add to this fresh geopolitical tension between North and South Korea and this weekend’s incident involving Israeli commandos and a Turkish ship off the coast of Gaza and there is enough turmoil to cause even the most dyed-in-the-wool bull to pause. At the very least, it appears global growth may be slower than forecast just weeks ago.
Technicians are well aware that the S&P 500 index has recently fallen below its statistically significant 200-day moving average mark. The index tested that 200-day moving average in May and
failed to “break-out” which is clearly a bearish signal for technical analysts. At Ockham, we prefer to view stocks from a fundamental standpoint but we do believe that it is important to be open to other methods and approaches. In our view the stock market may be headed lower in the near term, but we do not foresee a doomsday scenario. For now, US corporate earnings are coming in solidly ahead of expectations which should lend downside support to the market.
We continue to advise long term investors to hold less than their normal allocation to equities at this time as we see the current risk/reward profile in equities as unfavorable. We believe a buying opportunity may not be too far off, but at this point there is too much uncertainty regarding the global economy.
