What is driving the market rally — Technicals or Valuation ?
Well this morning, the answer to that question really depends upon your media diet.
This morning’s WSJ makes the case that technicals, and the market internals are what is sending stocks higher:
“[Technical] analysts forecast markets by following supply and demand for stocks, and they say there is enough strength and momentum in the current rally to push the market even higher . . . The number of advancing stocks has steadily outnumbered decliners. And the percentage of U.S. stocks trading at 52-week highs recently moved above 40%, the highest level since 1982, according to Ned Davis Research.
Even more important, the gains are widespread and aren’t showing signs of thinning out. When a bull market is nearing an end, weaker stock groups begin to turn down. Usually among the first to go are small stocks and those of companies most dependent on a strong economy.”
Bloomberg, on the other hand, makes the case that stocks are cheap:
“Even after the biggest rally since the 1930s, U.S. stocks remain the cheapest in two decades as the economy improves.
Earnings estimates for Standard & Poor's 500 Index companies from Apple Inc. to Intel Corp. and CSX Corp. climbed 9.1 percent on average in April, twice the gain in their prices and the largest monthly increase since at least 2006, data compiled by Bloomberg show. The benchmark gauge for American equities is trading at 14.2 times forecasts for its companies' profits, lower than any time since 1990, except for the six months after Lehman Brothers Holdings Inc. collapsed.
Income is beating analysts' estimates by 22 percent in the first quarter, making investors even more bullish that the rally will continue after the index climbed 80 percent since March 2009. “
To be sure, there are other factors at work:
-Money is still cheap with the Fed at zero
-The economic cycle has turned from recession to recovery
-The Dow 5000 Armageddon trade of 2008 is still being unwound
Excessively Bullish sentiment is the biggest risk right now — but even that seems to be moderating (I’ll dig up a chart).
You don’t have to choose what the basis of the rally is — just realize that as we go higher, the risk levels increase.
I believe Stop Losses should only move in one direction: Upwards. For quite some time, I have been an advocate of the trailing stop loss; tether stops to your holdings and get dragged upwards as prices rise.
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chart courtesy of WSJ
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Sources: Technical Support: Signs Point to More Stock Gains E.S. BROWNING WSJ, April 26, 2010 http://online.wsj.com/article/SB10001424052748703988804575205012364446950.html
Stocks in U.S. Cheapest Since 1990 as Analysts Boost Estimates Lynn Thomasson, Whitney Kisling and Rita Nazareth Bloomberg, April 26, 2010http://www.bloomberg.com/apps/news?pid=20601010&sid=ayxUdbONKGwo
Previously: Volatile markets call for stop-loss orders Using stops to limit risk, protect profits Barry Ritholtz Marketwatch, April 1, 2003http://www.marketwatch.com/story/volatile-markets-call-for-stop-loss-orders
Technicals, valuation…. or a third driver: lack of an alternative.
Money is worth what people pay for it, just like anything else. What comes cheaply goes easily.
Great advice/wisdom on the trailing stops.
http://preview.bloomberg.com/news/2010-04-26/u-s-treasury-will-sell-as-much-as-1-5-billion-shares-of-citigroup-stock.html
Now that I’ve seen this, surely the top must be in sight?
From Seeking Alpha today… Can an entire market rally really be engineered by a few computer programs using low-interest government loans from the Fed to make Billions of dollars for the same investment banks and their media lackeys who rate the market a BUY-BUY-BUY no matter how awful life is getting for the bottom 90%? Of course it can! …
Jeremy Grantham calls the market move “nothing but Fed-sponsored monetary pornography” (Zero Hedge) and perhaps that's what's really bothering me – if I think of my investors like children than I guess I see all these little market concerns like one of those predator maps that has way too many red tags around where my kids are playing!
Now don't get me wrong, I don't want to compare our fabulous IBanks to child molesters (although they certainly do enjoy taking candy from babies). It's only your money they are after and, as we see in the news every day, that's hardly illegal at all! So the market is forever blowing bubbles and the children are dancing without a care in the world. P/E multiples are flying, risk premiums are at zero and, as Grantham points out, alternate investment returns are so low that all of the sheep are being herded into the blind alley of equity and commodity investments – like lambs to the slaughter, as the saying goes. Yeah, just a little creepy"¦
I agree. I just can’t buy into this BHO/FED/IBANK generated “rally”. Talking to real people on the street and trying to figure our own operating budget for next year, I see money drying up. Homes are coming down a couple hundered thousand from where they were 18 months ago and jobs, what jobs? No new jobs are being created anywhere.
But, since a liberal is in office and the banks are flush with cash they ARE NOT loaning, might as well juice the market and take it to the moon. Problem is, when reality hits and the money dries up, Joe and Jane Sixpack who won’t have the guts to get in until its too late will be left holding the bag yet one more time.
Don’t underestimate the power of positive group think. Check the headlines from almost every, I mean every mainstream media (ex-wsj) news reporting organization. It’s all happy talk, all the time. Not a shred of reality based reporting out there folks. November can’t get here soon enough.
I’m feeling contrary today so:
Trailing stops can burn you too.
And, not that it is news but to anyone here, there is a lot of “divide by zero” juice in the y/y numbers. You only get that once. Neat chart over at dshort.com illustrates this point dramatically: http://dshort.com/charts/guest/SP500-corporate-earnings.gif
Haven’t got a clue if this sucker has more legs (hope so but castles built on vapor make for restless nights). In any case, stocks are pricey in historical terms.
SEVERAL new 52-week highs splashed all over my screen just this morning. TIF closing in on all-time highs. UFB.
When money is free, everything else gets expensive. That’s all you need to know.
What I can’t seem to understand or overlook is why, if everything is coming up roses, it all smells like shit. If you take fraud out of the mix "“ and that includes everything from laughable GAAPs to as yet unwound derivatives, to the vast number of limbo-bound real properties (both residential and commercial), to the worse-than-ZIRP course the Fed has committed to, there is little, if anything, holding the markets up. It’s all good and profitable fun, until somebody gets caught holding the bag.
To Curm’s point – Might this be an indicator of “something”? Literally got a cold, crisp 5-dollar bill in the mail from WSJ along with a survey on mutual funds. Has anyone ever had that happen before? At first, I thought the bill was a fake but then I realized it was real………
Cocktail chatter.. Own Goldman,what fraud? Don’t own Goldman, hang the bastards.
I think the Armageddon trade was largely unwound by the first week of July ‘09. What’s going on now is a relative lack of selling.
It’s hard to have a correction- necessary or otherwise- when ZIRP rules the times.
The market is going higher because nobody is selling, but the reason they’re not selling is because there is no place else to put money. Have we even gotten to the beginnings of the Johnny-come-lately portion of the rally? I still see a lot of idle cash out there.
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BR: Down 56% over 18 months was unwound in 100 days and 20% upside?
Why is the government in such a rush to get the economy moving and the markets to react?
They need to slow it down. They need to scrap the stimulus and cash for “American products” deals and start from scratch. They’re messing with fully 100% of the American economy with their liberal ideas.
Their policies will make prosperity permanent.
“since a liberal is in office and the banks are flush with cash they ARE NOT loaning, might as well juice the market and take it to the moon”
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