Market top?

[DOTTT]

Or is this a short term correction? I dont see anything in the near term the would push prices higher. The market has seen 5 weeks of very heavy selling, and is uanable to sustain any kind of rally. I sold most of my positions as of the close today. How about everyone else?

[adios]

A market top? Hardly. I predict that sometime in the next 10 years S&P 500 will make a new all time high. Certainly it will within the next 20 years.

I'm fairly certain you're referring to a much short time frame than 10 years. I think it's alwasy good to try to get a perspective of the pluses and minuses of the current market price level.

Pluses

1. Low interest rates - definitely a support for higher stock valuations.

2. Higher Corporate Profits - In general corporate profits are on the rise.

3. Stock prices have come in a little. To me it's always a plus when stock prices have come down. Hopefully I'll have cash to pick up bargains /images/graemlins/smile.gif.

4. Accomodative monetary and fiscal environment for companies and investors.

Minuses

1. Increased economic risk with lack of jobs growth in the economy. Not only is job growth lackluster, so is wage growth. IMO one of the reasons the market is pulling back here is that the risk that the consummer will cut back is a lot higher. When economic risk increases that market should logically decline. I'm starting to get the idea that the US may be at full employment right now. This would fly in the face of what many economists believe which is that the US can support a significantly lower unemployment rate.

2. Valuations have increased a lot over the past year. Stocks have to come in a lot more to make valuations significantly more attractive in many sectors. Lots of incentives to take long term capital gains exist. What I'm seeing is that as usual many stocks are getting killed indiscrimenently and inevitably bargains are created as a result. This is actually a good thing if you've got cash to buy em with.

3. Political uncertainty (translate higher risk). Certainly Kerry's chances of getting elected have gone up. Please don't interpret this as a Kerry dig because it's not. The outcome of the election is just more uncertain than it was and this simply translates to a "riskier" environment.

4. Unreal bond market action. Certainly lower interest rates support higher company valuations. However, I think the most recent bond market rally has the equity markets spooked quite a bit. To put it succinctly most equity investors expect a drop in bond prices (higher yields) with an improving economy and a rise in bond prices with a declining economy. We're seeing higher bond prices from an already historically elevated level. A lot of discussion regarding a bond market "bubble" has taken place. Personally I think the longer end of the yield curve is simply showing what the inflation outlook is in the long run. That outlook is low, very low, perhaps dangerously low. That ugly word I mentioned in previous posts is creeping back into the lexicon.

Whether it's a bond market bubble, a sign of the threat of deflation, and/or the sign of a weakening economy, none of the outcomes is particularly attractive. Strange as it may seem, I think if the 10 year Treasury backed up to 4% we'd see a decent rally in equities.