Weather Report – Interim – 04162017

Current Positions  (Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – up to 100%; G (money market) – remainder

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Weekly Momentum Indicator (WMI) last 4 weeks, thru 04/14/17

(S&P100 compared to exactly 3 weeks before***)

-3.43, -6.54, -1.94, -13.7

The absence in creating or changing positions since the election can be summed up by these two headlines, nearly five months apart.

November 9, 2016

There’s hope for the market under Trump

…..hope….

March 21, 2017

Stocks Plunge, Trump Trade Dies, Fed ‘Doesn’t Care’

….back to reality….

Technically, bonds are regaining strength, reversing the previous trends in interest rates.

Stocks have given up much of their gains built on the ‘hopes’ of healthcare reform, tax reform, relief in regulations, or, any of the political promises that fueled one more fluff-filled rally.  Optimism was enough to create this last opportunity.  It is not enough to sustain, or, incur any reasonable risk.

We know the prices, and the returns.  How do we evaluate the risks that come with appreciation?

Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market’s valuation. The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. This is similar to market valuation based on the ratio of total market cap over GDP, where the variation of profit margins does not play a role either.

At the market peak on March 1st, the S&P500 reached 2400.  At that point, this ratio was at 29.5.  The S&P500 is now at 2328.95, as of the close on Thursday, April 13th.  This places the current ratio at 28.8, or 71% higher than the historical mean of 16.8.  We are in the third most expensive market of the past 100 years!!!

There is simply no way to justify holding comfortable positions in U.S. equities at this point.

I will elaborate on these points in the next few days.

All of the pieces are in place for what appears to be a ‘final top’, or, at the very least, an extended, risk-filled churn to an insignificant new high, with an equal chance for measurable losses in the near-to-medium term.