About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Monday, March 06, 2017

Stock Market Profile

Cyclical bull market... Buttressed by a year of improving business fundamentals, low interest rates, still modest inflation...However, the market is heavily overbought for the 3-6 month term and is hyper extended especially for the long run...It is expensive on valuation and is facing an increasing headwind from decelerating liquidity growth.

The pace of the advance in such key weekly data as sensitive materials prices and the rate of
decline in initial unemployment insurance claims have been impressive over the past year.
The same may be said for the PMI new order data. Some slowing  in the progress of these
weekly / monthly indicators may be expected over the next few months, and this probably
will not escape investor notice.

Industrial production has been quiescent over the past year but appears set to accelerate in
response to strong new order numbers. Stronger IP will power up business profits but will add
to inflation and could well lead the Fed to take more aggressive action with short term rates. Such
developments could put upward pressure on bond yields and will lead some market players to
reassess their comfort level with the markets p/e ratio.

The market is now trading about 20x estimated 12 month earnings through Q1 '17. That is on the
high side of history and may not sit well as rising production adds cyclical pressure.

The Fed has been curbing the growth of its balance sheet and much stronger total business sales
is eating into the excess liquidity provided by the private sector. The liquidity picture is not yet
a negative for stocks but is darkening. Here too, rising production may play a role.

I am posting the weekly chart of the SPX early because it best reveals the heavily overbought
environment we are passing through. Overbought markets surely can get even more so, but we
are well along here and a loss of the strong momentum of recent months may not sit well.
Weekly SPX

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