Technicals Say, "We Need to Rest"

On the surface, there is no change in our Asset Allocation Model this week, but as we look inside the picture, we see that our Psychology Composite is now closing in on a P5 rating.  That would not be disastrous, but it would suggest that the market has gotten a little winded and a "pause to refresh" would certainly be called for (and healthy).

Let's look at the nature of the rally up to this point (in the chart below).  The US stock market, especially the larger caps with very good trading liquidity, has almost erased last year's correction that was excused by concerns about the US political gridlock, economic concerns, and worries about Europe.

Click on the image above to view a larger chart.

While our Psychology Composite is hinting that maybe it is time for some pausing and time to worry about something, our Valuation Composite, based on the valuation of the S&P 500, is sending us this message, which you can see in the chart below.

Click on the image above to view a larger chart.

It is immediately obvious that the valuation in March 2009 was so compelling that stocks were being offered at the best bargain of any time in the last 30 years.  So, the S&P 500 subsequently almost doubled in price.  Stocks are not as cheap today, but should we be crying about the high price?  Not even close.  We should be jumping up and down that they are still as cheap as at any other bear market low (excluding 2009) in the past 30 years.

Even though this S&P valuation is the most important to us, we also keep track of the ValueLine Appreciation Potential to determine how the average stock is priced.  Today, this calculation suggests that the average stock has a potential of 10.5% for the next 12 months.  We believe this is one reason that we have seen the large-cap universe outperform in the last few months.

So today, we're in "gray" time.  With our Valuation and Monetary Composites at their best ratings, and Psychology at only P4, things are not as "black or white" as they were a few months ago.  The market outlook for the short-term is a little murkier, but the long-term is still very attractive.

Don Hays

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