What do you see?
The young lady looking away?
What about the old lady looking down?
(Photo source: http://www.themarketingbit.com/marketing-2/perceptions-audience/)
These days the market is all about perspective. The challenge for all investors is the market is providing strong signals for both bullish and bearish investors. As I sat down to collect my thoughts on how best to describe the stock market right now, I came across a report from Art Hill, Senior Technical Analyst at StockCharts.com. His description of the situation was so spot on I simply had to share it with you…
This stock market has something for both bulls and bears. Bulls point to strength in technology while the bears point to weakness in small-caps. The bulls point to strength in the airlines, while the bears point to weakness in truckers. The Bulls highlight the recent surge in the finance sector, while the bearish point to the meltdown in retailers. The broader market does not know what to think and remains as mixed as ever.
…It does not get more split than that.
If the market is in a state of indecision what do we expect to happen next?
Let’s take a look…
Based on our research analyzing the fundamental and technical outlook for the economy, broad stock markets and individual companies, we concur with Art Hill’s view that, “This stock market has something for both bulls and bears”.
From an economic perspective, concerns over weak global growth have developed (the terror attacks in France do not help either); however, in the United States, the jobs market continues to look healthy. New claims for unemployment are holding at multi-year lows, and Job openings have climbed higher with the September data. Also, preliminary November data for Consumer Sentiment (University of Michigan/Reuters) came out and it moved higher than economist expected.
Employment numbers continue to improve (Bullish for the stock market).
Unemployment figures continue to decline (Bullish for the stock market).
Our biggest concerns remain within the technical outlook.
Secondary indexes like the Dow Jones Transportation Index and Utility Averages continue to be down more than 10% from their peaks reached last December and January. In addition to these indexes, we see that the Percent Buy Index (PBI) indicator is telling us that fewer and fewer individual stocks are participating on a longer-term basis. This indicates that the indexes (S&P 500, Russell, NASDAQ, etc.) are being supported by large cap stocks, while the smaller-cap companies in the index are losing ground.
Year-to-Date: DJ Utility Index (red) DJ Transport Index (blue), S&P 500 Index (green) (Chart Courtesy of StockCharts.com)
So where do we go from here?
All is not lost and our indicators do not yet suggest finding a cave and crawling in to hibernate. Having said this, we are not wildly bullish either. It is still great to be an investor in the United States vs. the rest of the world. There will come a day when international stocks are favored over US investments, but that day is not here yet. Also, we are heading into one of the strongest time periods for small-cap stocks. If small-caps experience a nice run through November and December, it could easily correct our technical concerns.
For investors, the best thing they can do is, “Keep it between the buoys” (referencing lyrics from a Jimmy Buffett and Alan Jackson song). This is not the time to make a major shift in strategy. Continue to focus on investing in what’s working and right now that is US focused investments.
As always, if and when the facts change — so shall we.
