At some point this market will have a correction and many will rejoice. Since October this market has been on a run. Regardless of your opinion where we are gains were had since we paid attention to the number one indicator: Price. Opinions do not get you paid in the market. Sure, getting on TV will get you paid. However, success in the market is not from getting paid for your opinion but sticking with the current trend. We can point to a variety of reasons as to why this market should not be where it is. A new emerging fear is price-to-earnings. We will not argue whether valuations are stretched, but trading based on valuations simply does not provide us with the best opportunity to maximize our profit potential. At the end of the day we will continue to focus on what matters and ignore the noise generated by the pundits across traditional and social media.
On the valuation side of the house there is no question we are well above normal levels. The NASDAQ is trading at 35x trailing twelve-month (TTM) earnings. The Russell 2000 trades at 39.37x earnings. At 21.94x TTM, the S&P 500 is well above its historical norm. We have been here before and there is no question at some point the market will reset itself. Given we are in earnings season the way to reduce the multiple is to have blow out earnings. While we would think it is likely earnings will not be big enough to adjust P/E back to normal levels, price will likely adjust too. Does this mean we will automatically see a 10% correction with blow out earnings? It is anyone’s best guess at this point, and we will continue to operate in a manner where we are controlling our risk through proper position sizing and stops.
Given we are in earnings season we would like to take the opportunity to remind you to know when your positions and potential new trades report earnings. We will see how this quarter’s earnings pan out. Price will be our guide.
AAII Bulls topped 40% this week. This is really no surprise given the rise in the market. Ending the week at 41.83% bulls returned to gain the top spot in the AAII Survey. Bears dropped to 27.51%. Not a real surprise here by any stretch of the imagination. While not at extremes we have seen the market pull in when Bulls eclipse 40%.
Let’s see where this market takes us. We will be with you every step of the way.
