Market Update - 10th January 2014

We have no changes to the model portfolio this week.

Equity markets have started 2014 in muted fashion. Investors, keen to book solid year-end gains, sold stocks right out the gate on the first trading day of the year and we have spent this week attempting to recover some of those losses. The Federal Reserve in the US is playing with fire as they attempt to cut back on their monthly QE purchases as their economy continues to struggle to find its feet.

The trend remains bullish for stocks in the short-term, as indicated by my technical trend indicator (below left), but stocks are expensive. The S&P 500 trades at 25 times the average of the last ten years of inflation-adjusted earnings (below right). We continue to believe that the risks are elevated that a downside break in markets will occur in the not too distant future.

 As of Friday, the technical trend indicator is 36 points above its long-term moving average.

As of Friday, the technical trend indicator is 36 points above its long-term moving average.

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Economic: On the economic front, the ISM Services Survey in the US indicated that business activity in the services sector remains in growth mode, although new orders have slowed. The US unemployment rate was reported at 6.7% on Friday, a positive percentage on the surface. However, the labour force participation rate of 62.8% is now at the lowest level since 1978. This means that 91.8 million unemployed Americans are not included in the unemployment rate calculation. If included, the UE rate is closer to 11.5%. Also reported on Friday, only 74,000 jobs were added in December versus expectations of 200,000. 

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Technical: From a technical standpoint, although the trend is still positive, the Advance/Decline Line continues to flatline, 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 17th January 2014