Market Outlook October 17, 2011

Thursday felt, to me, like we had passed the bottom. Yes, I’ve tried to maintain my optimism throughout this mini-bear market. I don’t know that things will necessarily get better. I have no objective measures, no facts or evidence that says the worst is behind us. It just feels that way. The past week has been a good week for equities (+4.0%). In the past, when we had positive weeks, they were followed by negative weeks, so I’m waiting to see what next week brings. In the meantime, stocks are showing better momentum (less negative) than in the past five weeks. Another week like the one we just had, and momentum will be back to the same as early August. Another two similar weeks after that, and it will be time to sell bonds and buy stocks. The two points I’m trying to make: things are looking better; and it’s not time to switch back into stocks just yet (for those trying to avoid further drops in market value).

While bonds continue to present better momentum than stocks, gold (IGT) is preferable over bonds. Although gold hasn’t performed very well in the last month (-5.3%), it has still been the best performer since I bought it in July. However, stocks have outperformed gold for the last two weeks, so I’m watching closely for a change signal.

We are just starting to see the beginning of earnings season. The first to report, Alcoa, was disappointing, and I think we’ll be disappointed by the banks. However, we will see what the balance of companies report, and how that corresponds to economic reports. My fair value estimate for the market has remained unchanged, but the market value has risen, so it appears to be less undervalued (by 2.7%).