The Morning Call--The S&P is 5% overvalued and getting more so

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The Morning Call

1/11/13

The Market

           

    Technical

            The indices (DJIA 13471, S&P 1472) neared recent highs (13682, 1474) yesterday, finishing within their short term uptrends (13000-13645, 1410-1478) and their intermediate term uptrends (13109-18109, 1387-1982).

            Volume was up slightly; breadth improved, though on balance volume doesn’t look good.  The VIX fell again, closing within its newly re-set intermediate term downtrend. 

            GLD was up, but remains within its short term downtrend and its intermediate term trading range.

            Chinese demand for gold keeps rising (short):

            http://www.zerohedge.com/news/2013-01-10/chart-day-chinese-november-gold-imports-soar-91-tons-2012-total-720-tons

            Bottom line: yesterday’s pin action suggests that this week’s consolidation is over.  That said, both of the Averages are near recent highs (13682, 1474) which should act as resistance.  Assuming that the underlying bid for equities is as strong as it appears to be, those highs should be successfully challenged.  Next resistance is marked at 14140, 1576. 

            Investors continue to exit the stock market (short):

            http://scottgrannis.blogspot.com/2013/01/stocks-gain-despite-equity-fund-outflows.html

    Fundamental

  

     Headlines

            US economic data was again mixed---weekly jobless claims were a bit disappointing while the wholesale inventories and sales numbers were quite positive.  Overseas, the Chinese trade data came in very strong; and I think that this more than anything else that drove investor sentiment.

            Away from economics, the news flow remains stuck on: ‘(1) the continuing monologue from the punditry on 2013 outlook, (2) early maneuvering on the debt ceiling talks, (3) Obama’s nominees for defense, treasury and the CIA...... (4) the....earnings season which started Tuesday night......’  and (5) Biden’s suggestion that Obama may implement gun control via executive fiat.’

Bottom line: the S&P closed approximately 5% overvalued, as measured by our Valuation Model.  Certainly, it can go higher; and the technicals suggest that it probably will.  However, I think that the issue is how far and what happens after.  My opinion is that the opportunity cost of not participating in any further price rise is far outweighed by the risk that prices could quickly retreat to 5% to 10% undervalued if our political class stumbles on debt ceiling/sequestration/spending cut problem.  Furthermore, even on the assumption that some compromise is reached without a government shutdown, that agreement is likely to be a non-optimal one, i.e. it will be largely comprised of typical government phony accounting.  In other words, a solution that will in no way enhance the valuation of equities.

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.