Author: Richard Moore
Covestor model: Market Comparables
The January stock market advance was very impressive, recording the best performance for the first month of the year since 1997. Volatility was reduced also, and the S&P 500 did not suffer as much as a 1% daily decline all month. Since the problems in Europe and concern over our own debt and deficit have not really changed, I attribute the market advance to the continuing stimulus being provided by the Federal Reserve, as that organization announced last month that they would be holding interest rates very low for the next three years. This forces investors to either take increased risk by buying stocks and higher yielding bonds, or suffer purchasing power losses due to nonexistent returns on cash and a weakening dollar.
My portfolio increased in value during the month but not at the same rate as the major averages. I am continuing to take a very cautious approach to the market, guided by my market indicators in three areas.
My sentiment measures steadily deteriorated during the month, as small investors and speculators took an ever more bullish stance as the market advanced.
Earnings estimates for 2012 have remained in a flat trend and I believe there is substantial risk of declining earnings because of economic problems in Europe. At the moment, though, I regard the earnings outlook as neutral.
Valuation also deteriorated during January and my indicator is neutral to negative.
I continue to maintain a very high cash position and I am using screens that highlight the stocks of companies that are larger and more liquid. An improvement in earnings prospects for 2012 would be a huge help in improving my market outlook as would a decline in stock prices that would improve my sentiment indicators and my valuation indicators. I don’t feel comfortable taking on increased risk at this time.
