Stocks Priced For Perfection, Hold The Corona

The economy is finishing its eleventh year of continuous expansion with virtually full employment, no overheating and excellent levels of consumer spending and optimism. The stocks often move months in advance of earnings and GDP trends and currently appears priced for perfection and better growth ahead. The benchmark SP 500 Index rose a stellar 28% in 2019 while its underlying earnings fell, thus the market is pricing in one heck of a rebound in revenues and profits in 2020. We continue to be a Bullish into 2021, yet record investor optimism and stock prices moving far ahead of their underlying forward earnings typically indicates that sideways to lower price action is needed for the economy and earnings to play catch-up. Having the conviction that the Bull will continue without a Recession long term doesn’t trump discipline in a richly valued market that warrants hedging for a pullback. The stock market is quite vulnerable to bad news events and the short term risk is rising over the Chinese Coronavirus escalation this week. Furthermore, we have been highlighting for weeks in interviews, newsletters, and updates that today – January 24th – is an inflection point for a possible selling wave to kick off. We may be able to hold back the Corona scare and flash an all-clear sign if this virus fails to become a global concern over the next week, but caution near our 3340 SP resistance in late January is warranted.

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With technology increasingly dominating the stock market, earnings become less important compared to sales and momentum for investors and managers. Analysts seemed to invent Price to Sales (PS) metrics to justify higher prices once the traditional Price to Earnings (PE) measure had become too stratospheric to rationalize Buy recommendations. However, even using the alternate Revenue or Sales metric, it’s worrisome that the stock market PS multiple continues into uncharted territory. The PS ratio has now surpassed the important twin peaks in January and September of 2018 prior to sharp market corrections. Even the tech bubble peak of2000 has been overcome. How high is too high? No number is absolute even as valuations become more extreme historically, but the market is certainly more vulnerable to negative news events. 

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Disclaimer: This report may contain information on investments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this communication ...

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