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Where's the S&P Headed From Here? Higher! - views
Stock Quotes in this Article: SPYStockpickr) -- To someone who just started investing in the last year, 2014 has been a bloodbath. In the first month of the year, the S&P 500 shed 3.56%. If stocks continued to sell off at this rate for the rest of the year, it'd make 2008 look like a cakewalk.
>>5 Big Trades to Profit During the Fed's QE Pay Cut But that doesn't mean that it's time to pull your cash out of the market and invest it in a backyard bunker. As we enter February's first trading session, stocks still look very attractive.
Yes, I realize that sounds hard to swallow. If stocks are on track to one-up 2008's selloff, how can it still look like a good time to buy them? But as I'll show you, nearly every data point that supports an end to the upward trend in stocks is horribly skewed.
So as things stand now, February looks like the month to hit the "buy" button again. We're still in a "buy the dips" market.
>>5 Stocks Ready to Break Out As investors, we have short memories. For instance, as soon as the calendar flipped over to 2014, we suddenly forgot that corrections aren't unprecedented for this market. Even though the market gave us eerily similar corrections in October, and in August, again in June, another time in March, and yet again back in January of last year, somehow this latest correction is jarring.
Even though the other recent corrections were larger in size and duration than this one, our January correction has somehow been scary.
And even though this correction was extremely predictable, it caught us off guard.
But you didn't have to be some kind of stock market sage to figure out that stocks were about to correct. The S&P 500 has been trading in an extremely well-defined price channel all the way up (you can see it here), and it finally hit its head on resistance in January. That means that we were either about to correct, or this time it was suddenly going to be different for some reason. Likewise, as the S&P gets closer to the bottom of its trend channel, we've got to ask ourselves whether we're coming up on another textbook buying opportunity for stocks, or whether "This time, it's different."
There's a reason why savvy investors say that those four words are the most expensive in the English language.
But just to cover our bases, let's take a look at why this time it might in fact be different -- and why those reasons are bogus.
Stocks Are Overpriced
The chorus of "stocks are expensive" has been getting louder and louder over the past few months, but that doesn't necessarily make it true.
As I write, the S&P 500's P/E ratio (based on trailing 12 month earnings) sits around 18.9. While that's on the high end of the index's historic range, it's hardly at an extreme right now.
>>4 Huge Stocks to Trade (or Not) Just for comparison's sake, the S&P would need to rally to 3,115 tomorrow to reach the peak P/E ratio the index hit during the dot-com bubble. Stocks might be "kind of expensive-ish," but they're certainly not expensive.
P/E doesn't tell the whole story either. For instance, it leaves out cash, something that's sitting on corporate balance sheets in record amounts right now. At last count, the stocks in the S&P 500 held more than $1.25 trillion in cash on their books, enough to pay for around 25% of the nominal value of each share of the big index.
Take that record cash balance out of the S&P's valuation, and it starts to look a whole lot more average.
The same problem is true of measures like Shiller P/E, a number that normalizes earnings over a decade to avoid skew from unsustainable profits. Problem is, when you normalize earnings over a protracted economic recession, replete with huge GAAP-induced non-cash earnings volatility, you get a number that's not all that useful.
It's not sexy or headline-grabbing to say that stock market valuations are pretty average right now. But they are.
>>5 Stocks With Big Insider Buying A Lack of Real Corrections
Here's a troubling statistic: It's been more than two years since the S&P 500 has corrected at least 10%. And we haven't had a healthy 5% correction day in more than a full year. If that doesn't show irrational exuberance, what does?
There's just one problem with that. We also haven't seen a 5% rally day since March 2009. That's something like 1,800 days. Likewise, this rally has been filled with proportionate corrections all the way up; it's been nothing if not orderly.
In my view, those scary statistics say more about prolonged low volatility than they do about a correction-free market. True, the big down moves have been few and far between, but so have the big up moves.
A lot of that volatility vacuum has had to do with a lack of participation from retail investors. That's right, despite some folks saying that being long stocks is a crowded trade in 2014, the fact remains that U.S. stock ownership is just 2% above the record low set last year.
>>5 Industrial Stocks to Skirt the Selling That's a statistic that's been echoed by the comparatively low trading volumes that our recent rally has propped itself up on. This has been an institutional rally, not a retail rally. A lot of investors who got burned in the market crash five years ago are only just starting to warm up to equities again.
By and large, retail investors don't own stocks -- and that means that there's a lot of dry powder sitting on the sidelines this year. Don't underestimate the buying power retail investors still hold.
The Line in the Sand
Does all of the preceding mean that stocks are guaranteed to bounce higher this week with absolute-100%-stake-my-life-on-it certainty? Of course not. But it does mean that a move higher is the high-probability trade. And in the real world, the high-probability trade is the best thing we can ask for as investors.
On the other hand, the line in the sand gets drawn in just below 1,750. If the S&P 500 can't catch a bid along its long-term trendline at that level, then it's time to start questioning the longevity of this rally. Price action on Thursday and Friday looked a whole lot like sellers were pumping their brakes as the S&P 500 approached a key support level. That's a good indicator. Ultimately, the big stock indices have been extremely technically obedient for the last year and change, so, until the technical story changes, I'll be buying the dips.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in the stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji