April 2010

Volatility with an Upward Bias

The Market limped home but still recorded a respectable 1.58% gain for the month and stands at a positive 6.96% for the year. See the Performance Page for our results.. With the market rising eight of the past nine weeks and almost eighty percent from the lows of March '09, many pundits are predicting a precipitous decline such as we saw in February '73, October '87, and March of 2000. Although this is always a remote possibility, according to my sources at Lowry Assoc., the chances of a collapse in the market at this stage are remote. Here's is the reasoning:  

• Advance-Decline of the indices hit new highs coincident with the market peak of April 15th.
• New highs versus New Lows have recently hit new peaks.
• Buying power recently hit a new high and selling pressure remains at a reaction low.

  The point is that in pre-crash conditions, the market invariably shows selective buying: In '73 it was the nifty-fifty, in '87 program trading in a select number of stocks, and in 2000 the concentration in dot com securities. As indicated in the above bullet points, none of these narrow buying conditions are present today.    From a fundamental standpoint, the market looks reasonably priced and is likely to churn higher over time. Placing an historical multiple of 14 x earnings and applying it to an estimate of $94.50 would give us a 1360 S&P sometime in the first half of 2011. Having said that, however, unlike Godot, this market will come home in the form of some volatile corrections of more than the two to four percent experienced in the past year. I think we're entering the second phase of a cyclical bull market, implying increased volatility with an upward bias.  

 

-Joe