Will Stocks Continue to Rise Following a Strong First Quarter?

Okay, the first quarter of 2012 is history, so this morning, let's assess what the rest of the year will bring.

If you remember, we saw that rare P1 signal from our Psychology Composite during last year's correction, but as the market rallied toward the end of the year, we saw this level drop to P3.  Then, we began the year with our Psychology Composite at P4, while our Monetary Composite was at M1 and our Valuation Composite was at V1.  That was then, and here we are now with the S&P 500 12% higher.

In a very natural evolution of rising stock prices and much better economic news, the herd trading stocks is more bullish, the Fed is feeling a little better about the economy (not great yet, but not in a panic mode), and yes, our Valuation Composite is still telling us that stocks are ultra cheap. 

In the chart above, you can see that stocks are not nearly as cheap as they were on March 9th, 2009, but they are as cheap as any other time, excluding these last 3 years, in the last 30 years.  In fact, history suggests that when stocks are this cheap, investors have the potential of achieving average 4-year results of 15.2% a year gains in stocks.

The evolution in the market did get a little more change in the rally of the last month as our Monetary Composite dropped to M2 on March 16th and our Psychology Composite moved down to P5 on March 20th.  As we reported following those changes in our Asset Allocation Model, the new ratings did not change our long-term bullish position.  P5 ratings are not "end of the world" important, but they do "sometimes" produce either a correction or some dysfunction.  And if you've been following our sector studies, then you know we've already seen signs of such dsyfunction.  So right now, what we need is a little more healthy fear to repair the slight cracks in the "Wall of Worry."

Yet, despite the dysfunction, which you can worry about if you like, remember that the long-term potential is still very dramatic for stocks in these next 3-4 years.

Don Hays

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