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Denis Ouellet, CFA
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Denis Ouellet has been involved in the Financial sector since 1975. Now retired, he is a part-time blogger. Denis has been analyst and head of research for a brokerage company, equity manager for various investment organizations (pension, mutual and hedge funds), head of global equity... More
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  • Tapering...Equities 0 comments
    Jan 16, 2014 12:44 PM | about stocks: SPY

    This bull is getting old.

    From The Short Side Of Long:

    (click to enlarge)

    (click to enlarge)

    The old bull in me is tiring. Time to taper…equities.

    Hmmm, I hear you, yes, you may be right, the Fed is taking care of us this time with all this financial heroin. And, yes, Super Mario will do whatever it takes and Abenomics are rewriting economic Japanese history.

    Plus, the U.S. economy is clearly reaccelerating, inflation is minimal, we're about to get Janet's "new and improved" forward guidance, the GOP finally learned its lesson and President Obama's golf game is improving by the day.

    Blue skies forever!

    I am only playing the odds here, not really knowing what markets will actually do in 2014. Honestly, that's all one can do, no?

    1. Ok, let's be objective here: we are into the fourth longest bull market since the Great Depression. The only three bulls that lasted longer ended in a speculative frenzy that eventually led to a catastrophe for their riders.
    2. The only thing blue skies tell me is that it would be nice going out, walking, golfing, fishing, hiking…Investment wise, blue skies are no reason to buy, or sell. If anything, if the skies are so blue, then everybody must feel great. The contrarian in me does not really like that.
    3. Trying to find a positive narrative, I looked at each previous market peak and I could not find any combination of GDP, inflation or profit trends that could signal anything in a consistent manner. Equities have peaked in any kind of trends, positive, negative or flat.

    1. The only consistency is the Rule of 20 valuation, currently at 19.7, when the average at the 16 previous market peaks was 21.7. Excluding the two internet bubble peak readings of 1998 (27.1) and 1998 (27.1), the average is 20.7 and the median 21.5. Charts of the actual P/E on trailing EPS and of the Shiller P/E at market peaks are provided below for those who care.

    Not a bear, but an old bull that feels the need to be careful for a while. Let's see how Q4 earnings stand and what kind of guidance we get. Let's see how corporate inventories finished the year. Let's see how inflation behaves and how interest rates trend.

    (click to enlarge)

    Better be safe than sorry!

    Stocks: SPY
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