The S&P 500 made a new 52-week high at 1,814 on 29th November 2013, then tried but failed to make a higher high this week before falling -2% by week-end. This may be little more than noise as we entry the light volume holiday period, or perhaps the strong momentum move of the past five years is starting to wane. We will learn more in the weeks and months ahead.
In the meantime, although the technical trend remains bullish (chart below left) 20 points above the long-term moving average, stocks remain expensive. The S&P 500 for example now trades at 25 times the average of the last ten years of earnings, adjusted for inflation (chart below right).
Economic: Data releases were relatively light this week. Initial jobless claims were 368,000 versus 320,000 est. while retail sales were slightly better than expected (+0.7% versus +0.6%). Economic growth is expected to pick up in the US in 2014 from +1.5% to +2.5%-3.0% and in the EU from -0.6% to +0.9%. Ireland is also forecast to growth next year by +1.5%. While the economic news is encouraging, much has already been priced in to the stock market.
Technical: From a technical standpoint, the trend is still positive, though the Advance/Decline Line is showing some weakness, unable to keep pace with the recent stock market rally. In the short-term, stocks are drifting as buying power and selling pressure have stalled.
Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.
Next update: Friday 20th December 2013.