Next Up - Super Committee - Week End 29 October, 2011

We had a good week. Markets rose solidly for the week.  Market technicals have improved with price over the one year MA and with the one month MA rising over the one quarter MA.  This was in response to the European plan and US GDP first estimate coming in at 2.5%.

The good news is that Europe came up with an action plan.  Much remains to be done, but it is an incremental positive.  Draghi's coming on board will also be an incremental positive; I'd expect to see a more balanced approach to the growth and price stability balance, in addition to the commitment to continue buying sovereign debt.  The likelihood of an interest rate cut has risen and this is positive.

I'd look for the markets to spend a few weeks consolidating with a downward bias (75 to 100 points on SP500).  After that a breakout or breakdown would depend on how the US handles economy and how markets digest the recent European action.  The French & German commitment to austerity and their pledge to provide no further support, together with the Republican's & Tea Party activists remain the greatest risks.  The markets are a very efficient & powerful leading indicator; now that Europe's plan is out, the markets should indicate the trajectory of the economy some six months out within the next couple of weeks.  Initial response is a relief rally in stocks, but the bond markets responded with rising Italy yields. A breakdown at the one year MA is a distinct possibility. 

I remain short term (6 months) optimistic since expectations are low and we need to test the theseus that enough has been done.  It will be positive if we see US markets trending in a range (even with a mild downward bias) to work of its overbought condition with falling volatility and EM's outperforming DM's; this is what I expect for November.  A rise into March and a subsequent decline in recognition of continued bad policy is in my view the highest probability event.  A helping hand from the G20 could be a powerful rally source - if the Europeans wont help themselves, perhaps someone else will.

Benefit of $ Cost Averaging a Myth?

One of the methods of investing commonly propagated by the financial services industry is $ cost averaging.  SP500 closed Friday at 1,238.  The annual average cost over the last six years was 1,227 - you could have stuffed your wealth in your mattress and used the it to buy the SP500 at pretty much the same level as a $ cost average investor. If you had bought debt or even invested in low yielding deposits, you would have outperformed a $ cost investor over the past six years.  A a portfolio allocator would have owned less equity over the first half of the six year period for the markets were expensive, and more equity during the second half when equity was cheap.

Do Earnings Matter - Weekly Snapshot 14 October 2011

Technicals deteriorated week before last, but the repair over the last week has been considerable.  

SP500 shows a weekly gain of 5.98%, a year over year gain of 4.33% and Friday closed at over the monthly and quarterly moving average with the index just 3% below the one year moving average.  Current index levels are also over the two and three year moving average and a mere two points below the six year moving average.

Sensex shows a weekly gain of 5.24%, a year over year loss of 16.66% and Friday closed at over the monthly and quarterly moving average with the index 7.8% below the one year moving average.  Current index levels are also over the three and six year moving average and somewhat below the two year moving average.

SP500 is now pushing against resistance at its 38.2% retracement of 1,228, though it does have place to run to 1,263.  Sensex has place to run to 18k levels.

How Cheap is the Market? Weekly Snapshot 30 September 2011

Markets technicals continue to look ugly, but not ugly enough. Valuation continues to look very appealing when viewed in the context of decade valuations.  But looking at valuations in the longer term the market will be priced for buying at lower levels:

Valuations investors have been willing to pay 1871 onwards says markets are attractive at 891.

Valuations investors have been willing to pay 1945 onwards says markets are attractive at 890.

Valuations investors have been willing to pay 1980 onwards says markets are attractive at 812.

Valuations investors have been willing to pay 1945-65 says markets are attractive at 940.

Valuations investors have been willing to pay 1929-45 says markets are attractive at 665.

Valuations investors have been willing to pay 1919-45 says markets are attractive at 805.

 Valuations investors have been willing to pay 1960-80 says markets are attractive at 884.

Valuations investors have been willing to pay 2001 onwards says markets are attractive at 1,143.