We have no changes to the model portfolio this week.
Stock market volatility picked up last week despite a relatively quiet week of economic news. First quarter earnings season has begun in the US and companies are reporting mixed results. Retail stocks for example were impacted after Best Buy reported poor results and its shares were pummeled by -35%. In the Financial sector, shares of Citigroup (-4%) and Capital One (-7%) declined, while Morgan Stanley bucked the trend, ending the week +7% higher. A more detailed summary is included in the following table. The S&P 500 closed the week with modest losses.
Outside the US, European stocks had a positive week with the DJ Eurostoxx 600 +1.8% and the French CAC +1.8%. Germany continued its recent strong performance +2.9%. In emerging markets, although Thai stocks rallied +3%, the majority of Asian and Latin American stock markets continued their declines. Mexico fell -2.9%, Malaysia dropped -1.7% and Brazil declined -1.0%.
The short-term trend remains bullish for stocks as confirmed by my technical trend indicator, which closed the week 32 points above the long-term trend. Longer-term, stocks remain overvalued and over-extended. The S&P 500 now trades at 25 times the average of the last ten years of inflation-adjusted earnings (below right).
Economic: On the economic front, news was broadly positive, with retail sales and various manufacturing surveys in the US coming in better than expected.
Technical: From a technical standpoint, the uptrend remains intact. Despite equities being over-stretched near-term, we have yet to see any material selling pressure. In fact, the Advance/Decline Line, a measure of stock market breadth, recently made new highs, a positive development. The current run higher may continue for a while longer. However, once the market switches to sell mode, a significant correction should occur. We wait patiently for that to happen.
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 24th January 2014