Interesting Test Level For Markets

Interesting test level for markets

Markets have a great run over the past few weeks,  from 31st December when the US Congress resolved the short term Fiscal Cliff issues, to recent days where markets seem to have stalled. More importantly though, stock markets have been rising for almost 4 years now. I accept that this was from very deep lows in March 2009 but it is still worth looking at short term market reaction and the longer term view. Before discussing this further, I still believe equity markets are suitable only for long term investors. These short term discussions are interesting but timing the markets is almost impossible to get right. In saying that, there are two key pieces of information that make me nervous for the short term with Equity markets.

1) Are we approaching another top?

Look at the chart below, which is a 15 years performance chart for the MSCI AC World Index. This is a very commonly used index for global stock markets. As you can see, we have just passed the previous highs from early summer 2007 although we are still below the all time highs in 2000. Investors are now also watching the S&P500, which seems to be struggling to breach the psychologically important 1500 level. Even yesterday it fell slightly, breaking a record 8 day continues run upwards, closing just below 1500. Can this run continue or will we have another short term slip such as those seen far right of the chart below in 2011 and 2012. A correction might offer some value?

2) Equities back in fashion?

The other key piece of information that makes me nervous at the moment is the ‘net inflows’ figure. In the US they publish the investor inflows to various types of funds. The current inflows into equity funds (for first 3 weeks of January) is at its highest since 2001. We all know what happened in 2001 when the ‘dot com’ crash followed. Typically, large inflows into equity funds, from retail investors particularly, indicates a market top as small investors are usually the last to enter the market in a bull run.

These inflows could just be cash being put to work as deposit rates are so low and bonds no longer look attractive.

Will the markets break through these barriers and move higher again, or will we have some corrections in the coming months to take some steam out of this bull run? There is always risk associated with investing in stock markets, but there are times when there is better value and times when markets look expensive. I think we are around fair value at the moment although starting to move into the expensive sector. S&P500 average P/E is aroudn 17 today which is not cheap (it was below 9 at the market bottom in 2009)

I’m always happy to give my opinion directly and chat about how this fits with your savings or investments at any time, just drop me a line.




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