HedgeFundLIVE — Let’s rewind back to exactly one year ago on April 12, 2010 and see what our Chief Market Strategist Jeremy Klein had to say on that day:
What Niagara can Teach us
I loaded up the minivan again this past weekend, threw the kids in, cued up “Alvin and the Chipmunks, the Squeakual” on the DVD player, and set the GPS for another long road trip. This week’s excursion went international as The Klein’s took Niagara Falls by storm. After getting soaked when witnessing up close the awesome power of The Falls on the maiden voyage of “The Maid of the Mist” for 2010, I, as usual, found a way to draw a parallel between the forces of nature and Mr. Smith’s “invisible hand” which guides our markets.
For those not fortunate enough to drive the approximately 400 miles from the New York metropolitan area, Niagara Falls resulted from varying erosion tendencies of separate types of rock to create different elevation levels for the Niagara River as it snakes from Lake Erie, its source in the South, to Lake Ontario, its terminus in the North. Water approaching the near 150′ drop just a few miles upstream travels innocuously before chopping up a bit just ahead of the inevitable plunge after which the river churns a bit before finally re-establishing its slow meander downstream. Sound familiar? It should, for given how markets are negatively skewed, that’s the usual approach stocks will take in its own cycle of a bull to a bear/correction back to a bull market. Given that we have now moved up an impressive near 15% from the February lows, I think it behooves most to search for key clues in determining when an inevitable retracement has begun. Doing so will allow one to pare down longs, ratchet up the hedge book, and/or get outright short to generate significant alpha versus the competition. I list below some of the critical market warning signs that I look for when hunting for that always difficult top to any power move higher in Equities:
1. Weakening Fundamentals – So often I receive e-mails from other market strategists who provide a laundry list of reasons on why stocks are expensive and should ultimately sell off. Unless it bolsters the point presented, the forward P/E on the SPX does not appear anywhere in sight, yet, by far, this multiple represents the most important piece of fundamental data available. Consequently, one can give me countless reasons why the market is rich, but if this metric has a 14 handle, I will tune him or her out immediately. Over the past several years, 16.5ish marks the moment when things get stretched. At roughly 15.3x currently, we sit nowhere near there. However, with Alcoa kicking off Q1 earnings season tonight, analysts taking note of the releases could conceivably take numbers down to get us closer although this remains historically unlikely.
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