November 2010

Internals Look Outstanding

The call for a modest correction of three to five percent was right on target, as the market pulled back 3.88% from its rally high of November 4th. For the full month, the S&P 500 was as close to even as I have ever witnessed, rising by the slimmest of margins, .01%, and thus remaining a positive 9.06% for the year. Our results are currently posted on the Performance Page. Despite being slightly overbought on a near term basis, the market internals continue to look outstanding and bode well for a resumption of the cyclical bull market off the March '09 lows. As far as the fundamentals are concerned, it is a bit more of a mixed bag. Here are some thoughts and statistics extracted from the Bank Credit Analyst:

• Economics continue to exceed expectations, but soaring financial risks in Europe are a cause of concern and could lead to a shallow correction over the next few months. If Spain becomes entrapped in the contagion (doubtful) all bets are off.
• Earnings yield (inverse ratio of PE multiple) is very competitive over corporate debt and should therefore favor equities over fixed income.
• China sold off over nine percent over inflation worries (mostly food), and credit tightening, but now is trading at a modest thirteen times forward earnings. Despite the fact that the trade has become crowded for all Emerging markets, I think the cheap valuations will go a long way to mitigate the downside risk.
• Commodities and gold took a breather with rising yields and China tightening, but remain well above their two hundred day moving average and appear poised for further upside.
• Oil has been trading in a narrow band, but with speculators now long on average, a breakout above ninety and a continuation of the uptrend seems imminent.

In sum, the equity markets continue to climb the wall of worry, and while there are certainly many uncertainties out there, all appear to be manageable. I like the way we're positioned as we head into the new year.

 

-Joe