The stock market looks to be making a slow and methodical top, but you can’t say that it won’t accelerate again after a period of correction or consolidation. So many blue chip companies are trading right at their 52-week highs (and close to all-time highs), yet their valuations are reasonable. Practically, what these corporations have to do is improve their earnings only slightly, and that’s reason enough for the share prices to advance.
But at the same time that we have stability in corporate earnings, reasonable stock market valuations, and a Federal Reserve that will do anything to appease Wall Street, other factors reveal a stock market that is losing some steam.
According to Bloomberg, average daily trading volume for U.S. equities was six billion shares in the third quarter, the lowest since 2008 and about half the average of 10.9 billion in the first quarter of 2009. Stock market trading volume has dropped year-over-year for 12 of the last 13 quarters, according to Bloomberg.
And there is still the nagging non-performance of the Dow Jones Transportation Index, which has been trending lower since May, with oil prices below $100.00 a barrel. This non-confirmation of basic Dow Theory is really bothersome. Recent earnings warnings from parcel and railroad companies can be viewed as the canary in the coalmine.
Predicting markets is a fool’s game with so much intervention from the Federal Reserve. But 2013 is shaping up to be a technically difficult stock market, with all kinds of potential shocks to the system, including the sovereign debt crisis in Europe and geopolitical uncertainty in the Middle East. I repeat my view that I wouldn’t be a new buyer in this market, even if earnings are great. We’re at the cusp of another earnings season, which is important, but I would wait until the next full-blown stock market correction before taking on major new positions in this stock market. (See “Stock Market Action Just Temporary—the Party Will Soon Be Over.”)
Corporate earnings should be decent enough to keep a positive bias to the stock market throughout most of the fourth quarter. The lost generation for stocks was actually last decade, with the market trying to balance itself out after the enormous technology-induced bubble. With corporations running such lean operations, it won’t take much in terms of economic growth for earnings to accelerate; this is the scenario that I envision, after further difficulty in 2013.
Red flags are going up everywhere in this stock market, but the main indices can still tick higher, because there is lots of room for expansion in valuations. It’s been a really wacky year for stocks, and anything could happen going forward; but it’s still reasonable to expect 10% annual growth in equity prices with modest earnings growth, dividends, and share buybacks. The next major correction should be an excellent new entry point.