Don't Despise the Record Highs!
Posted on January 17, 2020
I hope you had a great week! The market has continued its march higher, with the S&P 500 futures setting an all-time high of 3327 today. With the naysayers left scratching their heads, the bulls are clearly in control. This comes as no surprise to our Trading Club members, who will recall the positive scores on our Market Risk and Business Cycle Checklists which have been pointing towards new records for the stock market recently.
Let's begin with a look at Market Risk. Our Checklist is currently at +1, which suggested that investors should seek ‘risk’ over ‘safety’ in their asset allocation decisions this month.
As you can see from the relative performance of the Industrials vs Consumer Staples ETFs (cyclical and defensive sectors, respectively), the riskier bet has outperformed as expected as seen in the rising ratio on the chart.
More importantly for longer term investors is the further positive score presented by our Business Cycle Checklist. At +2.5 it signals further expansion in the economy, which should underpin earnings growth for common stocks contained within major indices.
Even though this chart was only updated on Wednesday, the S&P 500 is already some 40 points higher and looks set to register another record close at month-end. It is also important to note how earnings estimates (grey line) are also being revised upwards and have recently set new records.
All this looks great for stocks, as patient investors continue to compound returns. Looking at some of the leading names in the rally provides new inspiration for idea generation. Take for example Charter Communications (CHTR US), a popular name amongst funds, which has broken out to new highs and is on the cusp of its first major Fibonacci extension level (161.8%). An amateur may look at this chart and be eager to take profits, and maybe even consider shorting it, given the scale of the recent rally…
…but upon further inspection of the fundamentals, a savvy investor may consider the stock to have plenty more upside on the basis of relative valuation. Here you can see a screen which I discussed in this week’s Trading Club video analysis which shows Charter trading at a relative discount to its historical range.
This provides a basis for further investigation using our 5-factor Company Analysis model which Lex introduces in our Million Dollar Traders Course, and I hope to feature this for Trading Club members in one of our forthcoming weekly videos. I hope you can join me for it then! For our full analysis including new insights each week, or to learn from the ground up with online tuition from Lex in our MDT online course, get in touch with us today and take your financial knowledge to the next level right away!
James Helliwell | Chief Investment Strategist
Disclaimer: Our service is intended for educational and informational purposes only and should not be considered investment advice. Do not make any decisions based on the articles and material presented on www.lexvandam.com and never trade with money you cannot afford to lose. We cannot be held responsible for your trading results. For more information, please check Risk Disclosure - T&C.