Author: Richard Moore
Covestor model: Market Comparables
In May, my cautious approach was somewhat vindicated as the S&P 500 index (SPX) declined 6.3% and some major averages approached negative territory for the year. I continue to follow my stock market model even as it has become more volatile due to the volatility in the market.
The most problematic factor that goes into guiding future stock prices is earnings expectations. Earnings estimates for the S&P 500 have generally been increasing this year as most companies did a bit better than expected in the first quarter.
However, with the crisis in Europe and the slowing indicators in the US, earnings estimates have now gone to a flat trend. This, in itself, is not too worrisome but it could turn into a problem if we start trending down. I have taken this factor into consideration in arriving at a still fairly high cash position for my investments at this time.
Other indicators like sentiment factors and valuations have definitely improved as the market declined last month. Technical factors, on the other hand, have turned negative as they tend to follow the trend of stock prices.
I expect a rally at any time given the oversold position of stock prices and I currently have about 50% of my portfolio invested in the SPDR S&P 500 ETF Trust (SPY)–a relatively low risk stock ETF–in order to participate in such a rally. The character of that rally and the position of my indicators will dictate my strategy going forward. As mentioned above, the earnings picture needs to be watched carefully.
