Based on last week’s close for the holiday weekend, I would not be surprised to see a continued sell-off on Tuesday morning as the masses have had plenty of time to catch up on the risks associated with the new year. I also realize the money typically moves around by the money makers at the month’s end, some call it window dressing, and that money has a way of moving back into the same funds or stocks as the new month moves on.
What we see is that the almost all fund categories are pulling back, except for biotech and real estate, at least for the short-term. January is always considered an important month, setting the stage for the remainder of the year. However let’s look at the fundamentals for a moment. We will use John Burr Williams Equation that considers divided growth versus the 10 year treasury return. The current S&P growth rate was 6.99% or yield of 1.89%. If we assume the same growth rate, the S&P should return 8.8%. If the dividend growth reaches 10% (4% above the median) than we can expect the S&P to return 11.89%. That is 9.49% above the current 10 year treasury return. So fundamentally we can see that the stock market is much more desirable, risk considered, than investing in US government 10 year treasury bonds.
So what do we do this information? Well know the market will move up and down based on the current sentiment as well as media news reports. World wide events will certainly influence risk taking, bad news pushing more money into treasuries, lowering its yield (or return). It will be difficult to derail the economic bull at this point based on employment, labor wage rates rising, and the amount of money still out there for investment. So our job is to find will be use the market fluctuations to find the appropriate time to take advantage of these market moves.
Currently we do not see any buying opportunities in the many funds that we study. It does not mean that the money can not be made putting it to work tomorrow or holding on to current investments. However our objective is to maximize our return over shorter holding periods, this means we must excercise patience. Most equity funds will be remain highly correlated, but we do think the biotech, small caps, as well as the technology companies should perform very well this year. We will be watching for the right time to take advantage of the market psychology.
Cheers to the New Year of opportunity that lies ahead.
We will be in touch.