Current Market Trends – 4/12/2011

Earnings season is upon us once again, with a few companies schedule to release quarterly profit reports, revenues and their own forecasts in the coming week.  By perhaps the best measure, the market has already priced in much of the current economic recovery: the current modified price to earnings ratio (PE/10) for the S&P 500 index is currently at 23.5x, which is 43% higher than its long-term historic average (Source: Hulbert Financial Digest.).  So what you ask? The market has been overvalued by this much four times in the past 100 years: the top of the market in 1929 (just before the Great Depression), the mid 1960s (before a 16 year period of market stagnation and America’s run of hyperinflation), the late 1990s (just before the tech bubble burst) and yes, the top of the market in 2007 (just before the credit crisis and the onset of “the great recession”).

Will this time around be different?

So far, the markets themselves have been comfortable with these high valuations.  If they weren’t, the market advance of the past six months or so wouldn’t have happened.  With the Fed keeping interest rates artificially low, these equity valuations may be justified, and the current advance could very well continue for a long time.   But take away the FED stimulus (as some in Washington want to do) and interest rates would be much higher than they are today, causing these high equity valuations to become more of a concern.  In the end, if the concern becomes legitimate the market will reflect it.

Here’s our current view of the markets – our five-year ETF charts with both their respective short- and long-term trend-lines. All major market segments are currently in rising price trend environments, but as you can see several are weakening up a bit (large-cap growth, basic materials equities, and high yield bonds).  Because the markets are still in the throughs of a rising trend, we’ll hold our current assertive posture until prudent action (and risk reduction) becomes necessary.

By | 2011-04-12T11:34:16+00:00 April 12th, 2011|Market and Portfolio Commentary, Trend-Following|Comments Off on Current Market Trends – 4/12/2011

About the Author:

Mark’s commitment to objective, independent wealth management led him to establish The Appleton Group LLC in April of 2002. With over 19 years of experience in the financial services industry, Mark serves as portfolio manager for our private client group, and co-manages all assets held in our suite of portfolio offerings. His responsibilities include risk analysis, asset allocation, market research, and institutional client development. Mark also serves as both Principal and CEO of The Appleton Group LLC. He earned his Accredited Investment Fiduciary (AIF) designation in 2016