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 CCM Client Update Outlook For Remainder Of Year Still Positive May 7, 2010
CCM's research of stock market performance (1981-2010) indicates there is a high probability stocks will be higher one year from now (see details below). Given what we know as of 5:00 a.m. EDT on Friday morning, the best alternative is to hold our current positions. When the markets show some signs of stabilization, we will consider putting some cash to work.
The value of the CCM Bull Market Sustainability Index after Thursday's selloff is 3,750. Since 1981, bi-weekly values on the BMSI between 3,700 and 3,800 were followed by positive stock market performance in the subsequent year 80% of the time. The average gain was 16.22% one year after BMSI values fell between 3,700 and 3,800 (current value is 3,750).
For all bi-weekly CCM BMSI values (1981-2010) that fell between 3,455 and 4,395 (a broader range than above), the average gain in stocks during the following year was 10.75%. Stocks were higher 73% of the time one year after CCM BMSI values fell between 3,455 and 4,395 (current value is 3,750).
Further downside in the market is quite possible, even probable at this point. Our research and the BMSI cannot remove stock market volatility or magically help us sidestep it, but they can help us better understand the risk/reward ratio associated with remaining invested. Currently, the risk/reward ratio remains favorable.
Clients should expect additional market volatility in the days and weeks ahead, especially until we get some closure related to the debt problems in Greece, Spain, and Portugal. Bookmarking and checking CCM's Short Takes is a good way to stay informed (link at bottom).
The S&P 500 has risen 18 percent on average in the 12 months following 15 collapses, scandals and bankruptcies since 1970, data compiled by Birinyi show. The index has fallen 7.3 percent since April 23.
"Almost all bull markets have a correction at some point and that point could be now," said Jeff Rubin, the director of research at Birinyi Associates in Westport, Connecticut. "That doesn�t change the outlook for the year."
Yesterday's slump left the S&P 500 valued at 13 times forecast profit for the next 12 months, according to data compiled by Bloomberg. That's about 30 percent below its 10-year average of 18.4.
Profits for S&P 500 companies are forecast to jump 31 percent this year, the most since 1995, as banks, brokerages and insurers recover from losses. Earnings from continuing operations may reach $95.24 a share in 2011, exceeding the 2007 record, according to estimates of analysts tracked by Bloomberg.
JPMorgan's Lee reiterated his forecast in a research note yesterday that the S&P 500 will rise 15 percent to end the year at 1,300. Lee, along with Goldman Sachs Group Inc.'s David Kostin, was the most accurate equity strategist tracked by Bloomberg in predicting the market's gain in 2009. Both are based in New York.
While equities may post more losses as countries from Greece to Spain struggle to cut deficits, managers at Birinyi Associates Inc. and First Citizens BancShares Inc. say declines are a buying opportunity. The biggest one-day retreat since April 2009 has made American stocks more attractive by reducing valuations as the economy and corporate profits recover, said Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co.
Additional comments can be found in Short Takes.
Chris Ciovacco
Terms of Use. The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
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