May 2014 – Monthly S&P 500 Monthly Strategy Update

‘They’ tried to push the US equity market down, but it didn’t work.

 

We tried to have a correction in the S&P 500 in the month of April but like a beach ball submerged under water by a six year old the submerged ball keeps on floating to the surface of the water when the child’s hand is released.

 

Let’s have a look at the model price chart of the S&P 500.

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

 

For new readers we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

 

The US equity market, as defined by the S&P 500 Index, is in the middle of the zone between EBV+3 and EBV+4 as you can observe from our calculated model price chart. Upside to EBV+4 is 13% and downside or risk is almost 10% from the May 1st S&P 500 Index close.

 

As you can observe from our model price chart and weekly price bars the market tried to sell-off in the second week of April only to rise again in the following week. The market, again as defined by the S&P 500 Index, is very close to hitting all time highs as this blog is being written.

 

Couple of Key Positive Points

 

The month after any calendar quarter-end is always a busy time for us. Model price chart updates are being computed as fast as possible with the requisite evaluation on behalf of interested users. As April 2014 disappears in the rear view mirror I had two thoughts on this last month. One observation I would like to make is on April’s overall market trading action and the other on the general economic climate.

 

  1. The Market seems to be more Discerning and Rotational!

 

It has been a long time since the US equity markets has been rational or logical, from the vantage point of looking through the filter of our model price charts. What I liked about April’s market action is the market appeared to me more what a call “discerning”. What I mean by this is the expensive/momentum stocks heavily sold off while the true value stocks either held there own or had positive performance. In other words, investors and traders seemed to be rotating from the very expensive to the value names that in my mind are a sign of a healthy market.

 

Expensive valuation names like LinkedIn, Amazon, Tesla and other market darlings cratered. While the value names like Cisco, Intel, and Microsoft held their ground or gained slightly. This to me is a sign that money is finally staying in the market and acting somewhat rationally in that investors/traders are selling expensive stocks and seeking out value.

 

My sense and looking at long-term money flows, since the ‘Financial Crash of 2008’, was that when investors made any money or gains on their individual positions they would exit not only their positions but also the market entirely.

 

In order to have a healthy US equity market going forward we need to see money stay in the market and rotating through or finding value in stocks and the market as a whole. In my opinion we haven’t seen this discernment on behalf of money mangers in valuation in quite sometime.

 

Why, you may ask?

 

Value names are more at risk in a slow or worse a deflating economy. Cheap valuation names or companies carry more downside risk than companies that are growing double digits and exceeding analysts’ expectations. I’m NOT saying we are completely out of the woods yet, but there are healthy signs of US equity market maturity as investors are more discerning of the valuation of their stocks in their portfolios.

 

 

  1. Don’t tell the ‘Crash’ Bears, but the US has recovered all the job losses since 2007.

 

Certainly the chart of the month, if not the 2014 calendar year, is this one prepared by www.calculatedriskblog.com.

 

Chart courtesy of calculatedriskblog.com

Chart courtesy of calculatedriskblog.com

 

This chart does speak volumes. It speaks not only of the depth but also the duration of the ‘Financial Crash of 2008’ on US employment.  Well on Friday, May 2nd the US Department of Labor released employment statistics that now indicate the US has gained back all the job losses, dating back to 2007, that were lost during the last 5 and some years.  Yes, this is a good news story and a pivotal milestone has been reached.

 

Hopefully nothing like this will ever happen again and the next painful recession or economic downturn will be generations away.

 

Conclusion

 

All in all April was a good month, especially for value investors like us. Yes, we may have been close to flat, in terms of performance for the month, but for some of the growth and momentum crowd April ended up with negative rates of return not only for the month but also for the 2014 calendar year. Sometimes I have to admit market internals and economic progress is painfully slow to watch but baby steps (and I do mean little’s baby steps) are being walked in a positive direction.

 

Combining a painfully slow long–term recovery with a long and brutal winter season hasn’t impeded overall first quarter earnings that, when viewed from 40,000 feet, weren’t too bad.

 

The ‘Crash Bears’ were out in force this month when the high-flying momentum stocks started to correct in mid-month. However they were quickly silenced when the overall market quickly recovered and cash rotated to cheaper equity names. And then the economy added an exclamation point by printing a jobs number that even the ‘Crash Bears’ have to admit was a good number!

 

 

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