Author: Richard Moore
Covestor model: Market Comparables
The major market indices held up surprisingly well in July given the mediocre second quarter earnings reports and the continuing economic problems. My portfolio was in cash for the whole month because of my appraisal that the risk inherent in the current stock market outweighs the potential reward.
As we enter August, the earnings outlook for the S&P 500 Index (SPX) continues to deteriorate, both for this year and next. At this point, earnings estimates have been declining modestly although there is a risk of an acceleration in the rate of decline. History shows that it is very difficult for stock prices to advance meaningfully in this type of earnings environment.
The other indicators that compose my stock market model (available on my website) have actually become more negative in the last few weeks. Sentiment indicators show increasing bullishness on the part of small investors and speculators, a condition that argues for increasing concern. Valuation remains neutral and technical indicators recently slipped into negative territory.
I continue to remain out of the market until my indicators improve. Hopefully, the economy and earnings estimates will stabilize and improve as we make our way through the rest of 2012. Until there is some evidence of that improvement, I will continue to be very cautious.