Market Commentary: Market in Uptrend

If you’ll recall, the week of January 9^th produced a confirmed buy signal for our managed models. We allocated accounts more heavily to stocks at that time. This commentary will be an update on what the market has done since then, and what investors are concentrating on in the coming weeks.

Above is a chart of the S&P 500. The green arrow represents our confirmed buy signal. The market has continued its trend since then and is now approaching the previous highs set in 2011.

The market doesn’t move in a straight line (as indicated in the same chart’s volatile movements of 2011), and it would be normal to see the market take a pause or pull back a bit at these levels in order to provide a more sustainable, healthy uptrend. If the market can push above 2011’s highs, we could see a more substantial move to the upside that would last a few months.

Corporate earnings have, for the most part, been strong. Forecasts and guidance was cut in the fourth quarter of 2011 by many companies, and those same companies are now beating their own downgraded guidance. It’s a bit of a funny cycle we see, moving from a period of high uncertainty (the latter half of 2011) to building investor confidence when firms realize things aren’t as bad as they thought it would be. It’s another key component to a sustainable uptrend. When companies begin forecasting higher earnings numbers to attract investors and are growing overconfident, the same cycle happens in reverse when they fail to meet their own stepped-up guidance.

Europe has begun to fade into the background. It’s another investor behavior of complacency. Even though the problems are there, investors become more comfortable with them and don’t perceive them as being as big of a threat. Standard & Poor’s downgraded several countries, Europe’s rescue fund was downgraded, the IMF downgraded GDP forecasts for Europe, and Greece is struggling to come to a deal with investors on taking a huge loss on debt in order to receive their next chunk of financial aid. It’s a mess, without question. But on all of these bits of news, the market hardly skipped a beat. It’s important to remember that it’s not just factual information that we need to evaluate when we take a stance on market movement; it’s just as important to weigh investor perception of factual information. It’s a slight but important nuance.

All in all, we continue to be encouraged by the recent market’s actions and reactions.

-Victoria Bogner, CFP®