Market Outlook March 14, 2011

As a reminder, the purpose of this market outlook is to try and get a reading on where the market is right now. The purpose is not to predict the future, nor to explain how we came to be at this point. Those are things that no one can claim to fully understand. More of these thoughts to come in the next post.

Bond yields have moved lower, bond values are up and stock prices are down. This is the normal, inverse relationship that generally exists between these assets. Normally, a bear market occurs when the economy is overheated and interest rates are high. It would be hard to argue that the economy is overheated, given that earnings are still recovering toward 2008 levels. The market, however, may have gotten ahead of itself and appears to be correcting.

Wow. Stocks are down 4% over the last week. The new market level, 13,675 is very close to the 50 day moving average of 13,700. This level is what technical analysts look at for support, and in fact, the market dropped early Friday before climbing back to this level. If it seems low to you, think back to January when the high point for the month was 13, 560. Stocks have come up very far, very fast and so they still have much better momentum than bonds. It also may be worth looking at the VIX (volatility index), which recently moved from 15 up to 20. As a frame of reference, it moved from 15 to 45 early last summer when the market experienced a minor correction over about four months and it moved from 20 to 80 during the market crash of 2008. These things make me feel that there’s not yet any indication that this correction will be prolonged.

It’s interesting to note that my fair value estimate came in slightly below the actual market value for the last couple weeks. This week, as the market value has dropped, my fair value estimate has moved up. Earnings results seem to be fairly positive and earnings yields and dividend yields are rising. Many companies that pay a dividend will pay sometime in the next week or two, which should give investors more money to support stock prices.