Brieger overview Peter Brieger, Chairman & Managing Director, GlobeInvest Capital Management
FOCUS: North American Large Caps
Market Outlook:
In the very short-term, based on the Intelligent Investor’s Bull/Bear Ratio, the S&P 500 is “over-bought”. I don’t have similar data for the DJIA or NASDAQ Composite. That said I note that their current price levels are all above their 50 and 200 day moving averages (“DMA”) and for each index, they are continuing in an upward direction. Should one or more experience a correction that takes their levels back to their 50 DMA and 200 DMA, it would represent declines from their highs of 1.70 percent and 5.40 percent for the S&P 500, 1.80 percent and 4.20 percent for the DJIA and 2.30 percent and 7.00 percent for the NASDAQ Composite. We have always pointed out that a 5.00 percent to 10.00 percent correction could happen at any time for reasons that would be perfectly clear after the event. At the moment excluding any one-off geopolitical event, potential market fatigue or calamitous economic event, a correction of that magnitude is hard to see. Over-bought markets do not necessarily have to decline to eliminate their over-bought condition. That can happen by markets trading sideways for a period of time.
The TSX is a somewhat different story. As of the September 19 close it had declined about 2.40 percent from its recent high and had broken down through its 50 DMA. A further decline to its 200 DMA would result in about a further 3.90 percent for a total correction from its high of about 6.40 percent. Its performance from here is to some extent dependant on how the gold, base metal and financial indexes perform.
While gold is still up about 1.10 percent (future’s price) on the year there is no real technical support so one can’t rule out a further decline in to the high $1,100’s.
Oil’s (WTI) chart looks almost as dismal but at least there was a tiny uptick late in the week. I think one can make the case oil is either at or close to its bottom. For example, as of December, 31, 2013 the current futures price was $98.42 and the two year futures price was $85.36 for a $13.06 spread. With the disruptions in the Middle East, by early April their prices and spreads were $101.06, $85.96 and $15.70. By June 30th they were $105.551, $91.70 and $13.87. With a somewhat lessened fears about a supply interruption, as of June 19, 20147 the numbers were $91.77, $88.58 and $3.19 respectively.
I have frequently expressed the view that oil’s proper value was between $85.00 and $90.00. Indeed that is where the two year futures contract has held since year-end so the worst of oil’s current decline may be behind us.
Longer-term if the wildly optimistic projections of oil production from fracking come to pass I will have to review my assumptions.
Finally I refer to a chart of the stock market’s Super Cycle (courtesy of RBC Wealth Management – September 15,2014). The article and chart show that since 1950 there have been a number of “decades plus upswings and lulls”. The first was from about 1950 to about 1970. There was a lull from then until about 1982. From 1982 to 2000 it entered another period of rising price, (a CAGR of about 18.00 percent). From then until 2012 the CAGR was “just over 1.00 percent for that 12 year period. The point being is that if we are in a ten year plus economic recovery from the 2008 to 2009 period and that if I am right about a potential upswing in U.S. corporate revenues which would result in very positive leverage on corporate earnings, that may be the support for higher markets.