Market Summary
Deutsche Bank is out with a piece of research this weekend
mentioning the fact that the S&P 500 has just broken a record high thanks
to a median trailing PE ratio of over 18 – the highest we’ve seen since 2010.
They note that this PE ratio is 12% above the long-term average going back to
1960. The forward PE of 17.3 times earnings expectations over the coming four
quarters is 22% above the historical median. David Bianco attributes this, as
almost all of us do, to the incredibly low yields on bonds and their effect on
the equity risk premium. More interestingly, Bianco includes an acknowledgement
that it has now been 916 days since the last 10% correction for the index, or
3.6 years (last October’s Ebola /ISIS sell-off was 9-and-change percent
intra-day). We’ve not had even a 5% correction so far in 2015 despite a spate
of elevated volatility earlier in the year.
$20 Billion in withdrawals from equity funds last month was
the most since December of 2012. Both the Dow and the S&P hit new records
this week, although they have traded in a narrow range and volumes have been
subdued. Friday's dip left the Dow in the red. For the week, the Dow ended 0.2
percent lower and the S&P rose 0.20 percent. The Nasdaq added 0.8 percent
for the week. Volume on U.S. stock markets has been below the month-to-date
average for several sessions. On Friday, ahead of the Memorial Day long
weekend, about 4.9 billion shares changed hands on U.S. exchanges, below the
6.2 billion average this month, according to BATS Global Markets.
Investment Analysis
Investors have enjoyed an extended period of low volatility
and steady gains, but with the Fed on track to raise rates this year and major
indexes near records, the market could get a bit choppier in coming weeks. “I
think what Janet Yellen and all of the Fed officials have been doing is very
carefully choreographing their move. I think this is probably the most
telegraphed Fed liftoff in some time," said Bruce Zaro, chief technical
strategist at Bolton Global Asset Management, "they're concerned about the
markets' reaction."
In a thin volume-trading environment it’s safest to keep
your own trading light, since even in a slow grind you can get some
unpredictable moves. You don’t want to get caught on the wrong side. Knowing
when not to trade is as important as knowing when to trade. In the chart below
you can see how Technology, Materials and Financial stocks led the way the past
month. These are large capitalization sectors that are benefiting from the
weakened dollar. If you believe the dollar will remain subdued, bidding on
strong stocks in these sectors is the way to go.
By Gregory Clay
Investment Strategist
Click here to
gregoryclay@theoptionplayer.com
P.S. click on http://www.theoptionplayer.com/ to sign up for a free trading newsletter
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