March 30, 2015
Weekly Market Outlook
By Keith Schneider
Last week US equities regurgitated the meal Yellen fed to the markets the week before that. After rallying hard the day Yellen removed the word patience from her vernacular, US equities markets stalled and then gave up all its gains. Only the IWM (Russell 2000) was able to make new highs while the other key indexes SPY, DIA, AND THE QQQs could not muster the strength to punch thru. In fact, with the exception of the IWM, the markets are now basically flat for the year and below levels set back November 2014. The sideways choppy action begs the question, has one of the longest lived bull markets outlived its life expectancy and now experiencing topping action and distribution?
Although terrible market timing tools, market valuation metrics used properly, do give good perspective on what is mostly likely going to happen regarding longer term returns. One needs a smorgasbord of valuation gauges and the knowledge of what metric to apply during various market cycles. Then using marketing timing tools such as market phases, sentiment, intermarket analysis and market internals you can manage your portfolio accordingly. During the internet bubble of the late 1990’s the US equity market became hugely overvalued …. And stayed that way for over several years with the final blow off period giving investors massive 50% returns in the final 6 months before the bubble burst. This assumes, of course, you were nimble enough to leave the party before the last to leave, hardcore drunks. It has taken only 15 years for the NASDAQ to regain those lofty levels hit on March 10, 2000.
My two favorite models to determine long term valuation is Warren Buffets model that looks at the GDP versus Stock Market valuation and Tobin’s Q Ratio which looks at the replacement costs of all public companies versus their market cap. Only the internet bubble of 1999-2000 had higher readings than what both of these indicators are pointing to right now which are very high valuations.
Another interesting development is that Gold has bounced smartly against its recent lows. Additionally, the ratio between the SPY and Gold bounced off levels seen in 2008 before the financial crises. The selloff in equities along with the move up in gold moved that ratio sharply in favor of the yellow metal. Gold has been running counter to the equities market since 2012 and this week’s improvement, if it can sustain, is noteworthy.
On the geo political front, our pals in Saudi Arabia are squaring off against Iran in Yemen, while Iran has become our new ally against ISIS in IRAQ and Syria. All that sent Oil prices on a tear before retreating on Friday, but still up sharply on the week.
In a recent survey, Russian oligarchs are set to leave mother Russia in droves as the economy is imploding and taxes are set to rise. However, Putin’s positions got some relief with Oil and Gold up. Now he must turn up the heat even more on global tensions or his next disappearing magic trick may not work as well as his last one.
Every week you'll gain actionable insight with:
