My Argument For A Q4 Rally
Charles Sizemore | Sep 26, 2012 10:05AM ET
Modern debates no longer happen on stages with lecterns, or even over office water coolers. They happen via Twitter.
I lobbed a tweet grenade at friend and InvestorPlace Editor Jeff Reeves for writing “four-year high of $17 billion .
Normally, I might consider this a contrarian signal that we’re nearing a top -- and Jeff touched on this in his bullet points on market sentiment. But much of this improvement in sentiment is due to the massive sigh of relief that the Eurozone didn’t disintegrate over the summer. And I cannot stress enough how truly rotten investor sentiment had become after nearly five years of on again/off again crisis. There was a lot of catching up to do.
3) Valuation
Most importantly to any value investor, stocks are not priced expensively enough to signify a major top. I am the first to admit that markets can take short-term plunges for any reason or for no reason at all. But real bear markets generally start with stocks priced aggressively, and I don’t see this as being the case today.
No, the S&P 500 is not “cheap,” per se, at 16 times earnings. This is roughly in line with the long-term average price / earnings ratio for the index of 15.
The Interest-Rate Effect
But remember, we are not in “average” times. Short-term interest rates are capped at virtually 0%, while the 10-year Treasury yields a pitiful 1.7%. In a low-interest rate environment, stocks should have a premium valuation, which we simply don't see today.
To be clear, no bull market goes straight up. There are always corrections or sideways consolidations along the way, and that is what we have seen for the past week. Stocks have drifted slightly lower as traders take profits and digest their gains.
But until I see real signs of a breakdown, I see no compelling reason to pull the plug on an aggressive allocation.
My Advice?
If you’re feeling uneasy, tighten your stop losses or sell down some of your biggest winners of recent months. But don’t go into bunker mode and miss what I expect to be an explosive end to 2012.
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