$SPX: How To Navigate The Unknown



How To Navigate The Unknown:

I can’t tell you what will happen this weekend or how the market will react on Monday (no one can)- but I can tell you that barring some unforeseen event, the tape remains strong right now. Since fear is elevated and many people are “afraid.” I thought it would be appropriate to revisit an older post (Feb 28) I wrote that presents the bullish a case for stocks down the road.
Of course, anything can happen but until more technical damage occurs. I have learned that the best way to navigate the unknown is to align yourself with what is actually happening, not what someone thinks will happen. The market knows best. Keep in mind, the broader trend (technicals) and fundamental case (below) remain bullish. Until that changes, don’t fight the tape. Trim your positions? Buy insurance? Sure. Do whatever is necessary so you preserve both your mental and physical capital. But remember the best trades tend to be the most difficult trades.
Also keep in mind the $SPX just rallied 8.4% in 6 wks and is now only 2% below its record high. In the old (non QE) days a 10% rally for the entire year was considered healthy.  So 8.4% in 6 weeks, the market has earned the right to pullback a little and digest its latest move.
Earlier Post titled- here:

Simple case for higher stock prices

Largest Economy In History & VALUATIONS Are Attractive

The market continues acting great considering how weak it was acting just a few weeks ago. The benchmark S&P 500 jumped to a fresh record high on Monday which is very healthy. Late last week, the Nasdaq Composite, Nasdaq 100, Philly Semiconductor index ($SOX), and Mid Cap indices ($MDY) all hit fresh 2014 highs which further supports the bullish case. During the entire pullback, we repeatedly said, that this appears to be another shallow pullback in size (% decline) and scope (weeks, not months) within a broader uptrend.

The Economy Is At Record Highs- & Growing

In the middle of February, Barron’s lead article suggested 4% GDP growth for 2014. If that occurs, it would justify higher prices for stocks (that is a big “IF”). Even if it is less than 4%, valuations are still not horribly extended when compared to prior significant market tops and the US economy is the largest it has ever been in history and is growing (albeit at a slightly slower rate than Wall St would like).

Valuations Are Attractive Compared To Prior Market Tops

Right now, the S&P 500′s P/E is just over 17. In 1987, and in 2007, it was near 22. In 2000, it was over 29! Bottom line: valuations are still within reason and are much lower than prior significant market tops. Of course, this secondary as price action always comes first in our book.
Separately, the $SOX (Philly Semiconductor index) broke out of a very long 12 year base on Friday and hit its highest level since 2002! This bodes very well for the broader market and the tech-heavy Nasdaq composite. 

The Only Thing That Matters:

Looking forward, since Friday is the last day of the week and month, the bulls want to see the S&P 500 close above 1850 and the bears want to see it close below 1850. At this point, that is the only thing that matters, everything else is noise.