Wednesday , 21 February 2024

These Indicators Suggest Stock Market Returns Are “Too Good To Be True”

[The following is presented by Lorimer Wilson, editor of and and the FREE Market Intelligence Report newsletter (sample here – register here). The excerpts may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Hui goes on to say in further edited excerpts:

Current macro conditions indicate that we are in a sweet spot for equity returns.

1. The U.S. economy continues to revive and it is starting to show signs of growth acceleration.

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2. Housing: Short-term and coincidental indicators are all pointing up but…[there is concern] about the rise in mortgage rates…[going into] late 2014 and early 2015…[and,] in particular, the bond market’s reaction to the inevitable Fed tapering, whenever that occurs…Will long rates start to back up and push up mortgage rates and dampen growth in the cyclically sensitive housing sector?

3. Europe: European leading indicators are still pointing up, though coincidental indicators still look punk. The ECB has made it clear that it is prepared to give the market a Draghi Put, which is supportive of growth.

4. China is growing, albeit in an unbalanced fashion.

Simply put, global growth is continuing and there is little or no tail risk in the immediate future. It’s time to get long equities. What could possibly go wrong? [Really?]

Too Good to Be True?

Maybe it’s because I apprenticed under people who lived through the terrible bear market of 1974-75 that I worry so much, but I have this nagging feeling that these market conditions are too good to be true. If you look, there are a number of technical and fundamental clouds on the horizon:

1. 2014 is the second year of the Presidential Cycle, which is usually not equity friendly… The two first years of the four-year cycle are usually the worst with the last two usually the best. Bear markets usually occur during the first two years. Since 2013 (the first year of this term) was so strong, historical odds for 2014 (the second year) to suffer a downside correction are pretty high.

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…Assuming the four-year pattern repeats, the next bottom is due in 2014 and most likely during the fourth quarter. That carries both good and bad news. While the second year of a presidential term (like 2014) is usually the weakest, the third year (2015) is usually the strongest. The bad news is that 2014 is likely to experience a major stock correction. The good news is that correction should lead to a major buying buying opportunity later in the year.

2. The Value Line Median Appreciation Potential, which has a growth tilt, hasn’t been this bearish since 1969. The Value Line Median Appreciation Potential (VLMAP) represents the median of the projections made by Value Line’s analysts of where the 1,700 widely followed stocks they closely monitor will be trading in three to five years’ time and, but for brief exceptions, the VLMAP…[hasn’t been this low] in many decades…In fact, you have to go all the way back to early 1969 to find another time in which the VLMAP spent as long a period [7 weeks] at 30% or below [as it is currently]. From then until the market’s December 1974 low, the Dow fell more than 40%.

3. Legendary value investor Warren Buffett has stated that, while equities look fairly valued, he can’t find anything to buy….This is a case of watching what Buffett does, not just what he says. When he says that he can’t find anything to buy, you have to start getting cautious.

When both Growth (VLMAP) and Value (Buffett) are cautious, then investors have to get especially wary. The combination of positive short-term indicators and analysis from Value Line, Buffett et al point to the same thing.

  • Short term momentum remains positive and stocks remain in a multi-year uptrend but
  • longer term indicators, such as valuation (VLMAP and Buffett) and longer dated economic indicators…are flashing caution signs so markets rally for now, but watch out as we approach late 2014.

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4. VIX levels are low by historical standards, indicating that the price of downside put protection are relatively cheap. Investors should consider staying long equities today but start to accumulate cheap put protection into mid-year.

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My base case scenario calls for stock prices to continue to grind upwards until mid-2014, at which point some unknown catalyst is likely to send equities downwards. Some time during Q2 and Q3, I would have to re-evaluate the macro conditions and re-position portfolios accordingly. 2014 is sounding like a good year to be selling in May and go away.

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]


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