Tuesday, December 31, 2013

Great Year! What Next?

As usual, I'm trying to see market future based on three metrics.
Usually the most important metric. And it's not clear now. On the positive side, economy is growing. Not only in US, in the whole developed world. On the negative, we have two metrics on the top of the range: S&P P/E ratio, currently 20.32, is much higher than average (about 15) and quite high for non-recession times. Profits as percent of GDP, currently above 12.5% before tax, are at all-time high. It doesn't mean that market is at the top. But to make market growth sustainable, GDP should grow faster. Fortunately, it does grow at around 3.5% last 2 quarters. In short, fundamentals are neutral to slightly positive.
They are gr-r-r-r-r-r-reat!. Except for the fact that almost every stock index is overbought. But, as we know, overbought condition can be worked out as a function of price or as a function of time. And trend is your friend (unless it's the end).
Scary. I mean, the sentiment is very, I would say, extremely, bullish. I don't remember such sentiment since the end of 1998. Of course, we had one more year of huge growth left then. But it all ended bad. The only bright spot: most people are still reluctant to invest in stocks, it's still a market for professionals. So there is a room for expansion yet. But if average Joe doesn't come to the stock market soon, things might get really ugly. Because bullish sentiment usually means that there are no buyers left.
I write to explain to myself what I think about market. Started this article with a bearish feeling, which was helped by the fact that the last quarter of 2013 was obviously huge window dressing by (grossly) underperforming funds. But, with technicals very bullish, fundamentals neutral to slightly bullish and bearish sentiment I have to come to conclusion that things aren't that bad and we might still have bull market in 2014. Of course, a lot of things can happen and even without major events market can behave quite unexpectedly. But I think the best idea would be to be brave, take some risks and make money on the long side.

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