Stock Market Analysis for the Week of May 20, 2013 By: Dempster R. Cherry

Photo Credit: http://www.herdaily.com

Photo Credit: http://www.herdaily.com

The Dow Jones is up 16% on the year, and up 1.6% last week for a record of 15,354. The S&P 500 has ascended 16% so far this year, and has risen 2.1% on the week, also at a record of 1667. The NASDAQ has gained 14% on the year and rose 1.8% last week, sitting at 3499.  According to Factset, the S&P 500 has a valuation of 16.5 times greater than estimated earnings.  That temperature’s like Goldilocks and the three Bears’ porridge, just right, which leads to the question at hand…is this just the start of a multi year Bull Market?  In the last seven months there has not been a significant pullback (of at least 6%).  The few shallow ones that have made appearances were quickly disseminated away with a continuing upside rally.  Could this be an alternative definition of irrational exuberance.

The bond market is having a brutal year, being mired in its first losing quarter since 2006.  It’s been absolutely no fun for fixed income investors this year.  The wholesale inflation rate for the last 12 months is 0.6%, its lowest since July 2012. Treasuries have been dropping as investors continue to rotate into an ascending stock market that peculiarly seems to not have a termination date. The markets ups and downs have justifiably been tied to weak corporate fundamentals, and that alone should align with a logical deference towards greater caution.  More indicators than not continue to forecast an essential pause, even a slight to modest dip, in the market indices that is overdue and necessary.  Needless to say, the drum roll for equities has continued unabatedly.  Dare I say, without a significant event sitting out over the horizon, the current momentum could take the S&P 500 index above 1,700 by the end of summer.

Investors are shouting, ‘Damn the torpedoes, full steam ahead,’ even as the Federal Reserve’s monetary policy looms large. Chairman Bernanke testifies on the economy Wednesday morning in conjunction with an afternoon release of the Fed’s latest policy meeting minutes.  Since last month’s meeting, the improving economic data has lessened the general fiscal weakness and has provided further catalyst to the upside for the bullish continuance of economic activity we are experiencing.  However, being the hesitant contrarian that I am, I will remain cautious even with the favorable improvements.  I’ll be digesting the minutes of the Federal Open Market Committee (FOMC) to see whether sentiment is slanting towards winding down quantitative easing sooner rather than later.  A quicker exit from QE is the market’s primary downside risk which would, in sequence, involve that mysterious market pullback that has failed to materialize thus far this year.

I remain optimistic.  The Bears have been getting their tail ends handed to them and the Bulls have continued to open champagne bottles. The CBOE VIX “fear factor” index has been down 31% to 12.45, its lowest since mid-April.  When ECB President Draghi makes a speech in London on Thursday, investors will be focused on the central bank’s residence in a global pecking order of forceful monetary easing, including not only the U.S. Fed, but also the Bank of Japan, Bank of England and Swiss Central Bank.  I’m expecting that the positive momentum will continue.  Nevertheless I’d be a fool to not anticipate weaker overall data.  I’m cautious, observant and optimistic.

Have a great week!
Much success in all that you do.

 

Dempster R. “Bobby” Cherry
Investment Advisor

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