(Un)Steady as She Goes
Comment of the Day

January 16 2018

Commentary by Eoin Treacy

(Un)Steady as She Goes

Thanks to a subscriber for this report from Goldman Sachs which may be of interest. Here is a section:

In weighing the two sets of forces that bear upon our clients’ portfolios, we draw the same conclusion now that we have since November 2013when US equities entered the ninth decile of valuations: that clients should remain fully invested in equities and beta-driven assets despite high valuations. We show why we believe US equities are not yet in bubble territory, and are driven instead by underlying earnings and continued economic growth. We also analyze the current low level of inflation volatility and its impact on equity valuation metrics. Finally, we provide our expected returns for 2018 and the next five years, including our tactical asset allocation recommendations, and dispel the persistent myth of mean reversion in equities and fixed income yield levels. We conclude with our key takeaways.

Eoin Treacy's view

Here is a link to the full report.

I saw a headline this morning that the Dow Jones was more overbought on an RSI reading than at anytime in the last 114 years. That’s quite a record and highlights just how well the market has done since September amid a period of extraordinarily low volatility.

The Dow Jones Industrials Average hit a record 26,086 this morning and pulled back from that level intraday before paring the decline towards the close. Downside follow through tomorrow would signal a peak of at least near-term significance has been encountered. The Index has not pulled back by more than 500 points since May so a reaction of more than that would be required to signal more than a pause within what is an accelerating uptrend.

Boeing, Caterpillar and Nvidia pulled back sharply initially but also pared the declines to avoid posting downside key day reversals. Downside follow through tomorrow would confirm peaks or at least near-term significance. Both Boeing and Caterpillar sport wide overextensions relative to their trend means suggesting a lot of good news has already been priced in.

Bitcoin pulled back sharply today, which is further evidence that some of the froth is coming out of that particular market. The number of people quitting their jobs to either trade cryptocurrencies or start funds is quite startling and reminiscent of the heady days of the late 1990s. It is almost emblematic of a bubble peak.

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