The Market Does Appear To Want To Go Higher

Includes: EFA
by: Roger Nusbaum

A couple of items from Barron's to chew on.

First is an article titled The Worst of Times to Buy Stocks? which features analysis from a couple of people including John Hussman. People who read Hussman at least occasionally will find his comments familiar.

He notes the following current concerns with US equities;

  • the Standard & Poor's 500 trading at more than 8% above its 52-week exponential moving average
  • the S&P 500 up more than 50% from its four-year low
  • the "Shiller P/E," based on the cyclically adjusted trailing 10-year earnings, developed by Yale economist Robert Shiller, greater than 18; it's currently 22
  • the 10-year Treasury yield higher than six months earlier
  • the Investors Intelligence's bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears

Hussman says these indicators add today to a list of "A Who's Who of Awful Times to Invest" similar to past times where the market has gone on to do poorly. However he also concedes that these factors can persist for weeks or even months before the market starts to roll over.

I've been writing about Hussman for many years as I have taken a little bit of process from him to create my own process. One difference with this part of the process is preferring to take a "defensive posture" when index price levels indicate there is a problem. An observation like the one offered by Hussman is, in my opinion, a reason to become more skeptical but not yet make portfolio changes.

The indicators notwithstanding, the SPX was up last week. While a week means nothing in the grand scheme, the news was generally not good until Friday but it went up a little bit anyway. I don't know if the YTD move is enough to be considered a buying panic; it appears as though the market does want to go higher for now. That may reverse at any time of course - the easier path right here seems higher.

That is merely an opinion. If it continues to be right, we can go with it. If it turns around, if nothing else we can heed the 200 DMA to lighten up. When I say if nothing else I mean that in the past there have been trades to lighten up when things are going well and I would attempt to repeat that in the portfolio but if I don't, we still fall back on the 200 DMA.

The other thing to mention from Barron's is the interview with George Greig who manages the William Blair International Growth Fund (BIGIX). There is not a lot to say but I found the country allocation to be interesting.

As I look at the performance tab on Morningstar the fund has tracked closely to its benchmark index for the last five years (did not look at other time periods). The reason the country allocation is interesting is for how unremarkable it is. Other than 10% to Japan, versus 20%, it looks very similar to the iShares EAFE Fund (NYSEARCA:EFA). BIGIX has 23% in UK, 10% in Japan, almost 30% in developed Europe and only 3% in Australia. BTW the makeup of the fund on Morningstar is as of 1/31/12 so there may have been changes since.

I'd love to know the history of the country allocation although based on the five year chart I would guess that Europe has always featured prominently in the fund. Here I will bang the drum for the value in figuring out what to avoid and then actually avoiding it. In general terms it can be difficult for a portfolio manager to avoid large portions of their benchmark, either because they are prohibited from doing so in which case they are stuck, or because if they do avoid something, they end up being wrong, causing a big lag and thus hurting their career one way or another.

No idea whether any of this plays into the mutual fund mentioned above, I am just talking generally. If you are your own portfolio manager you certainly do not have these constraints. If you are able to spend the time on these things and your work concludes that the fundamentals for some region or sector are truly awful then you can underweight or otherwise avoid it.

This is useful to keep in mind as you read articles like the interview mentioned above or you see segments on stock market television. Many of those folks were always going to have exposure to Europe and/or financials. Wherever the next crisis occurs (I mean the next one not a continuation of this one), you will see plenty of interviews with people who for whatever reason are going remain heavy in the ground zero segment because they really have to or think they have to.