Weekly Risk Report 3/26/2010
The rising market has now pushed the Speculation component of our risk indicator to Bearish thresholds for both the smaller and larger cap markets. This can be appreciated when we see the Best Performing stock in the last 13 weeks up over 276% while the Worst Performer is down just 53%. All stocks currently on Value Line’s 13 Week Best Performers list are currently up over 53% in that short period.
The P/E of both the larger and smaller cap markets continues to rise. This means stock prices are rising faster than reported earnings. While still manageable, the trend can’t continue too much longer. Either earnings must rise or prices must stabilize (or drop). A year ago it only cost $11.60 to buy a dollar’s worth of earnings where this week that same $1.00 of earnings would cost $17.60. In the smaller cap stocks the situation is slightly worse. Last March one could buy a dollar’s worth of earnings for only $10.40, but today one would have to pay $18.60. Clearly, the bargains were there a year ago.
Still, doing a quick head count, we see over 1300 new highs with only 52 new lows this week. That is tempered only by knowing that just a year ago the markets were near their cyclical lows and the only way for most stocks to go was “up.” This can be seen in the shorter term volatility index (^VIX) as well. There’s little divergent thinking on the part of investors right now. All seem convinced as to the market’s general direction.
This general enthusiasm for the stock market brings back some money that had been on the sidelines for as much as 18 months or more. As the new arrivals are buying, the SignalPoint process has been slowly reducing its inventory. This has the effect of capping the amount at risk in the markets for our clients. With only one component currently slightly bearish we are encouraged by what we see in the portfolios. We remain cautiously optimistic.
