Sax Angle Partners put up very good numbers for June, up over 5.5% for the month. We did that in spite of finding very few equities corporate insiders were willing to buy.
With the market at all-time highs, it’s natural to reflect on how much is left in this bull-run?
Based on the five phases of the business cycle, it looks like there is plenty of gas left. My read of this chart is that we are probably in the early upswing. Stock prices have more room to the upside.
First of all, is the market overvalued? Is it set for a fall?
Based on the Gordon growth model the market is fairly valued, not over valued or undervalued. The stock market is not particularly high if you buy into low interest rates as far as the eye can see. The equity risk premium has shrunk dramatically The S&P is yielding 1.9% or paying $37.52 in dividends. Consensus is that dividends can grow about 5% next year or $39.40. My return expectations or discount rate is 7% (that might even be too high in an ultra low rate environment). Following the Gordon Growth model, the denominator is 2% (7% – 5%) resulting in an S&P of 1970.06 or precisely where it is.
If you are an adherent to the efficient market hypothesis, much of all this information is already reflected in the market. If that’s the case what’s technical analysis telling us about the outlook?
Based on the charts, the market looks like it could take a short term hit.
So our conclusion is that in the short term, unfriendly headlines could easily dislodge price levels. Most investors are already fully invested. You see evidence of this in the sharp 4% downward movement of the Russell 2000 this month. Some names we have picked up on this drop include Taser, Insys Therapeutics, and Merrimack Pharmaceuticals. I continue to remind myself that you make money buying low and selling high as uncomfortable as that might feel.