Author: Richard Moore
Covestor model: Market Comparables
The market continued its winning ways in February as it slowly but surely moved ahead. Most major averages surpassed the levels attained in the spring of 2011. A diversion has developed, though, because the average stock, as measured by the Value Line Geometric Average is still more than 9% lower than its peak achieved in May of 2011. This is symptomatic of a market where leadership is diminishing and is a warning signal that difficulties may lay ahead.
My indicators also continue to forecast a risky environment. My own sentiment indicators highlight the fact that most small investors and speculators are quite bullish. They could certainly become even more optimistic but caution is usually warranted when my indicators get to these levels.
Earnings estimates for 2012 for the S & P 500 have been in a flat trend for many weeks. This fact is not particularly worrisome on its own but increasing earnings are important to stock prices and it is hard to see the rationale for better earnings given the problems in Europe and now the increasing level of gasoline prices that act as a tax on consumers.
Finally, valuation seems somewhat elevated to me. My own indicators imply a slight overvaluation in stock prices that could become worse very easily with any increase in interest rates.
I continue to take a very cautious view of the stock market. I am a very risk adverse investor who lives off his own investments so I am interested in preserving capital as a primary goal. The risks present in today’s market lead me to continue to hold a large cash position while participating to a limited extent in any further market appreciation.
