Champagne on Ice

Markets were up 2% across the board this past week. Earnings have been great on easy comparisons. New and existing home sales skyrocketed last month and are at levels not seen in decades. Investor fear is nonexistent.

The Dow Jones Industrials and the NASDAQ have been up eight weeks in a row and up 10 of the last 11 weeks. Money seems to be coming into the market in waves from the sidelines. Is this an all clear signal? Certainly not! At least not from the way valuations and sentiment appear.

The bull vs. bear’s survey of market newsletters is showing a frothy picture. Bulls exceed bears by 36 percent, according to Investors Intelligence. The last time this sentiment indicator was this extended was in January, just before the NASDAQ corrected more than 9%.

The VIX Index that measures investor fear is currently at levels only seen at market tops. The Producer Price Index, which measures inflation at the producer level, was up 0.7% in March, which annualizes out to over 8% annually. Friday it was reported that Durable Goods Orders declined 1.3% in March resulting in the first drop in four months. For those watching at home, those numbers are not healthy.

Yet the market is the final arbitrator of all information and for now it continues onward and upward. Thursday the markets were down significantly only to reverse late in the day and close slightly positive. Days with that kind of market action are called “reversal days” and they usually indicate further follow through from the day’s end direction, and Friday the market did not disappoint as the S&P 500 closed up at levels not seen since September 2008. The NASDAQ is now back to levels held in May 2008.

Next week 152 of the S&P 500 members will report their quarterly results. It will be the busiest week for earnings. According to Thomson Reuters, on average S&P 500 revenue is expected to be up 10% year-over-year while operating earnings are on track to increase 39%. However average stock prices have moved significantly higher than that than the first quarter of last year. The big question remains, have these better earnings already been priced into current valuations? Certainly not by the markets action over the last several weeks, but we invest for the future and time will tell. It’s definitely a time for caution not exuberance.

Next week the Fed meets and we shall be on watch for any change in policy regarding interest rates. I doubt they raise rates, but they may signal a plan for the removal of their long standing accommodative policy of free money. Next week also ends the stimulus for housing with the removal of the tax credit for home purchases for qualified buyers. How much of an effect that has on the housing market will be watched very closely by investors. If the housing market is unable to stand on its own, I think a correction in the stock market will also be forthcoming. The problems in Europe remain and are too lengthy to list.

Stock action seems to be forecasting a huge rebound for the overall economy. A V-shaped recovery would be the perfect outcome after a near global depression. While I am optimistic – I would leave the champagne on ice for now.