NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients Saturday, January 21.
This market continues to defy all naysayers. On Wednesday (January 18th), the S&P closed above 1300 for the first time since July 28, 2011. It is now up 4.7% on the year (through January 27th) – the best start since 1987.
One red flag, however, is the low quality of the rally. The rally is being led by the worst performers of 2011 while the high quality stocks which did well last year are lagging.
One example of this is the homebuilders. The Dow Jones US Home Construction Index, which consists of 7 homebuilder stocks, is up about 60% since October.
Another example is the outperformance of the financials. Bank of America (BAC) is up 27% so far this year.
Also of concern is the less than great start to earnings season. Through Friday (January 20th), 55% of companies reporting earnings beat estimates (18% of the S&P has reported so far). That is below the average of the last 4 quarters (69%) and the 10 year average (62%). The most notable miss was Google (GOOG) which got slaughtered on Friday (-8%).
Next week is the biggest for 1st quarter earning with 119 S&P companies reporting. It is hard to see how we will avoid a correction if earnings continue to come in below expectations.
Finally, sentiment is starting to become quite bullish. It’s been quite a while since I heard investors as bullish as Michael Yoshikami and Stephanie Link on Friday’s Closing Bell.
Monday is the first day of the Chinese New Year and this is the Year of the Dragon which is supposed to be lucky. Asians are forecast to flock to the casinos. Stock investors may as well do the same thing because at this point the stock market is a lottery ticket.
THE BOLDEST OFFER IN INVESTMENT MANAGEMENT HISTORY:
Starting now I will guarantee at least the return of the S&P 500 in 2012 after fees to the first $1 million in new investor money.* That is, for those investors, I will make up out of my own pocket any deficit between the performance of your account after fees and the performance of the S&P 500 this year. I will sign a contract with you to this effect. You will thereby be guaranteed at least the return of the S&P 500 and any upside to it will be yours as well.