Momentum Keeps Driving S&P 500 Higher, But Valuations Reasonable

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Momentum Keeps Driving S&P 500 Higher, But Valuations Reasonable

“Davidson” submits:

The employment statistics delayed by the government shutdown were released  +today with the Household Survey higher by 170,000 and the Establishment Survey higher by 148,000. I prefer to use the Household Survey as it counts the self-employed and provides a more meaningful picture of employment trends. In the chart below Auto & Lt Vehicle Sales and Household Employment series are presented to show the trends since Feb 2006. The correlation between these series is quite strong with vehicle sales leading employment trends by 9mos-12mos. Both series are in significant up-trends with no discernible changes their respective growth rates since July 2011. The important economic trends continue to forecast economic expansion in the months ahead. As goes the economy, so goes the equity markets!

As goes the economy, so goes the equity markets!

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The markets are moving higher simply because the news is improving. Many investors invest with the ‘Headlines”. If something is better than expected, then they believe stock prices should be higher than before the better news was announced. This is Momentum Investing! Recent history shows that Momentum Investing has come to dominate equity markets since 1995 when Hedge Funds exceeded ~$100bil in assets.  +Today Hedge Funds control some $2trillion in assets!

In the recession months equity markets find their lows due to buying dominated by Value Investors such as John Castle, Wilbur Ross and Warren Buffett. Their buying is detected by trend followers some of whom follow the Value Investor lead. This how I have observed market lows are created.  Later in the investment cycle the market pricing dynamic changes entirely. Once economic headlines turn more positive, Hedge Fund Momentum Investing becomes a major positive driving force. In the past two market peaks Hedge Fund buying lasted till the economic news turned negative. When the news turns negative, Hedge Fund positions turn from being net long to being net short. Even though the investment markets have had strong performance since March 2009, it is only recently with the markets passing through the ‘sell in May’ period(May-October has typically displayed market weakness with many on vacation) with a decent price expansion, i.e. SP500 (SPDR S&P 500 ETF Trust (NYSEARCA:SPY))  has risen from $1,597 in May to $1,745  +today. The mantra for Momentum Investors is ‘The trend is your friend.’ It is my opinion that Momentum Investors are now pushing the market higher on better headline news. This should continue till the economic news turns negative.

The mantra for Momentum Investors is ‘The trend is your friend.’

It is my opinion that Momentum Investors are pushing the market higher on better headline news.

The data released  +today indicate that economic trends continue as before. If the past repeats, then we may see the equity markets significantly higher 4yrs-5yrs from now.

Momentum

Via: valueplays

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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