Stock Market Analysis
Conclusions: The week ended with the Dow ahead by 0.80%, reducing its yearly loss to a slender 0.70 percent. Other averages, including the Russell 1,000 large stock average, have risen just over 2 percent year to date. Among the sectors, it appears that investors are seeking income, the Utility sector was ahead almost 4.5% over the same time period while commodity based sectors such as energy and staples lost ground. Aluminum, copper and lead commodities also lost ground for this year. Advances outstripped decliners for the week, as the advance-decline line set a new high.
Market sentiment? Investor Intelligence advisor sentiment shows more bullishness, as the difference between bulls and bears has advanced over the past three weeks from 24.4% on the 11th of February to 39.5% presently. Meanwhile the Commitment of Traders shows professional (Commercial) positions in shorts to be much larger than the long contracts, while non-professional trades are on the long side, with more than six times longs shorts. Other sentiments? According to our data sources, insiders are selling about 147 shares for each 100 purchases. (At the ’09 bottom, they were buying almost 572 shares per 100 sales.) Corporations are also selling shares at a high rate and approximately 42% of SP500 firms have already done so. Meanwhile Wall Street advisers suggest they would buy more than 10 stocks for every one they recommend selling, (they normally sport a bullish buy/sell ratio of about 8:1).
Value measures? Stocks are not cheap. They trade about 104% of GDP which is historically an extended region, in the past closer to peaks than to bottoms. Dividend yields are about 1.84%, and prices trade near 4.4 times book value, also extended. We would not rate these sentiment or value measurements as reasons for optimism about stocks. But neither are they causes of immediate alarm. We do note that our long term stock indicators are positive, suggesting a moderate setback here could establish a good base to capitalize on America’s long term potential for its superiority in cheap, abundant energy, as well as technology, and entrepreneurship.
Our weekly market risk indictors are now no better than neutral. We believe it prudent to follow our indicators, maintaining a modest position in the most favorable bargain stocks, ones with good defensive characteristics, while always keeping an eye on the exits. We recall that larger stocks often do better in periods of declining markets and some may display lower volatility.
F James, Ph.D.
Bond Market Analysis
Conclusions: Rumors of war and instability in the Ukraine caused impressive moves in the U.S. Treasury market. On Monday, when reported tensions were peaking investors sought solace in the safety of our Treasury market with our 10-Year bond offering a yield of 2.60%. As the media story switched from one of panic to a more optimistic overture, yields rose and ended the week at 2.80%.
A closer examination of the Ukrainian situation suggests the issue is far from resolved and holding high-quality bonds may make for excellent diversification for most investors. Indeed, diversification continues to be a hallmark of prudent long-term investing. Regrettably, many asset classes have been losing their diversification credentials.
Trent Dysert, a researcher here at James Investment Research, carefully studied the correlation effect for assets like gold, private equities, oil, real estate, and bonds. His data suggests that since the Federal Reserve began extraordinary actions (such as quantitative easing) almost all of these assets are moving more and more in lock-step with the stock market and robbing investors of diversification benefits. An exception? Bonds. Treasuries continue to march to a different drum beat.
Also it is important to remember that bonds often perform best when economic tidings are the most challenging. Many pundits sang the praises of Friday’s job report. For the month of February 175,000 jobs were created. This is hardly reason for celebration. In the last five years our adult population has risen by 12.2 million individuals. The job growth over that same time has only been 4.4 million.
Further disquieting signs include a precipitous decline in overseas shipping. We find, for example, the Baltic Dry shipping index has declined by almost 30% in the last 90 days. New orders for manufacturing, as reported by the different regional Federal Reserve reports, are now flat. Housing, another key economic component, is also suffering as mortgage applications to purchase a home are down 19% over the last year.
One great investment truism is, “When everyone knows about a great deal, the deal is usually over.” The reciprocal is also true. When no one believes in a deal there is usually great opportunity. It is in this latter camp that bonds find themselves today. Economists surveyed by Bloomberg News expect that the next seven quarters will see nothing but higher interest rates. Such universal disbelief in bonds suggests opportunities ahead. Indeed, it would not be surprising for bonds to outperform stocks this year. The key for both investments will be in making the correct tactical shifts.
Presently our indicators are favorable for bonds. Stories both positive and negative out of the Ukraine have the opportunity to whipsaw the financial markets in the short term. Should yields become temporarily richly priced, we would consider this an opportunity to extend durations.
David W. James, CFA
