Brief Introduction
My focus is "Investing Wisely", e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating modern analytics within these cycles means maintaining a process of thorough fundamental, technical and consensus analysis of the marketplace. I believe that this discipline provides the necessary clarity regarding the rotation that most all companies go through; from favorable times to unfavorable times and perhaps back again.
My "weighting" of these three rather well known components of securities research is as follows: fundamental analysis - 40%, technical analysis - 35%, consensus analysis - 25%. Each as a number of subsets within my work/analytics. I will share just one for each in this missive on why I believe there's a compelling argument regarding prudence on owning securities in today's marketplace.
Fundamental
Most agree that the S&P 500 "rules". With this in mind, focusing on the coming earnings reports for next year and the possibly rising interest rates, there is clear fundamental evidence that seeking a safe harbor is prudent.
Here is a chart of earnings that may help you understand why I do my valuations and why we are still In trouble economically!
The below chart illustrates how the rise in earnings and the very recent (major) fall in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio).
Most of you know that this (valuation) is my primary "fundamental" thing. Invest in only the best securities in bull market environments - and - invest in only the worst securities in bear market environments.
Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line).
The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s).
As a result of the recent spike in corporate earnings, however, the PE ratio currently resides at a level not often seen over the past two decades.
I suggest that the below chart is well worth your time for a brief study. It should at least cause the bulls to pause, at least for a minute or two.
Notes for chart.
Saying it nicely, revisions to analyst earnings projections only require a little more work/analytics to get it right. Once completed you have one of the best leading indicators to provide a path to inflection points for the general stock market, sectors, industry groups, and their component companies.
You will note in this chart that the 12-month forward S&P 500 earnings estimates peaked at $103.61 per share right when the market peaked in October 2007. It bottomed in March 2009 at $60.08.
The consensus analyst earnings estimates on a 12-month forward basis peaked this year in April, again in phase with the S&P 500 at $94.79. It has since declined for five months in a row and so far in September is down 1.3%, to $86.74.
So you may say that it missed the September rally, and you would be right. Except for "new/funny math". Think about that.
Technical
The VIX is fast approaching levels that are consistent with very high complacency. I know - most investors currently believe that, stocks can't go down, the economic recovery is here, and that it's a "win, win" market, etc. I disagree and this "technical" indicator is a solid reason why. The VIX sinking below 15 - 16 is a sign that investors are increasingly confident, removing hedges and leaving their portfolios exposed to greater risk. Think about that!
Many of the most brutal sell-offs in recent years were accompanied by the exact same environments - government had intervened to save the economy. All is going to be well in the world, and on and on. The market has a way of fooling the majority of investors the majority of the time. It is looking like a very good time to be hedged - or in cash, not necessarily because you're bearish, but because it's the currently the wisest/prudent investment strategy to maintain.
Here are a couple charts of the VIX and VXN that may help you understand why I am bearish!
For a current (up to the minute) chart of my "Bellwether" 5 market indices, 12 sectors and 23 high profile companies click and then scroll down.
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID4095527
Consensus
Consensus analysis is a very special part of my methodology. Simply stated, the "Street" provides information and data, and investors react. Their reactions are compiled in two ways that I use very carefully. The first is the "consensus opinions" of financial analysts. The second is "investor sentiment" of a collection of Investors. This information is published quite frequently and requires a substantial amount of interpolation to arrive at usable facts.
My two main sources of consensus information are - the American Association of Individual Investors and Investors Intelligence Advisory Sentiment.
For most Investors, the single most important piece of information and data are earnings. This is ok, but using a Pavlovian response to published data is often taken as "fact" - frequently leading to poor investment decisions. Don't just follow; get a perspective of who is thinking - bull or bear. It is clearly wise to "go with the flow" rather than buck the consensus trend. That's called consensus analysis.
With regard to investor sentiment, recent empirical research has uncovered several families (financial analyst groupings) of pervasive regularities. Two that stand out are: under-reaction of stock prices to news such as earnings announcements occur, and over-reaction of stock prices to a series of good or bad news. This sentence is a gross understatement of the problem.
As you know, from my articles on S&P and Company "Valuation," I believe that it is actually many families, meaning mutual fund, institutional and media driven (compensated) financial analysts. Over the past couple of years, and more so recently, consensus earnings has become inconsistent and frankly all over the map. I have been working on a parsimonious (money-grubbing) model of investor sentiment, or of how investors actually establish their beliefs, which is consistent with the continued flow of empirical findings. The model is based on psychological evidence and produces both under-reaction and over-reaction for a wide range of parameter values.
Here again is supportive information and data for taking a prudent position with your investment portfolio.
Here are a couple charts that are remarkably accurate in forecasting!
My Wrap
It is important that this article not be viewed as a recommendation for the purchase or short sale of any company or ETF at this time. Favorable to the process of "investing wisely", it is intended to suggest that - weighting fundamental, technical and consensus data is very helpful to identify inflection points as the marketplace cycles from Bull to Bear and back again over and over and over again.
It is this continuous "cycling" that presents us all with clear inflection points. So the good news is that we are given frequent and conservative (low risk) opportunities to "invest wisely" or to simply hold cash.
Source & Data Information: BarCharts, Bauer Capital Management, Bloomberg, CNN Money, Fortune, Harver, MSN Financial, SafeHaven.com, Seeking Alpha, StockCharts, Reuters, Yahoo Financial, Worden.
My Current Bottom Line:
* I am holding 100% Bearish Positions.
* Patience and Discipline - waiting for my list of Fundamental, Consensus and Technical - "Conformations" to all fall into place is part of the necessary process for "Investing Wisely".
* Inflection Points historically have occurred historically about three - five times per annum. We have already had 5 clear and meaningful Inflection Points so far this year. Investing at or around the time of my Inflection Points has proven to be a profitable way to invest.
* In my late August posting, I said: "The Market is now (very possible) setting up for another meaningful but likely (short in duration) Rally!" It certainly did rally!
* Now it looks just the opposite. One of these days this choppy and bifurcated market (late April to date) will do something meaningful and the next possibility of that is a meaningful Pullback.
* High Volatility may not currently be showing up on VIX due to the current rally - but VIX being an Inverse Indicator, I can assure you that it is clearly - alive and well.
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Thank you for your time in reading my "stuff" and continued interest in my work.
Smile, have Fun - "Investing Wisely",
