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Since our last longer-term, inactive account commentary in January, the
market has moved higher, despite one or two small speed bumps. Our long-term account
had moved to a 75% stock fund, 25% cash (G fund) allocation in early January,
waiting for a better opportunity to move back to a 100% stock fund
allocation.
Because we did not get the correction we anticipated, the long-term
account did not do as well as it would have had it been fully invested;
although it did outperform the return of the C fund and a diversified
account. Here is a look at the TSP Talk longer-term account return
for the first six months of 2007, compared to the other TSP funds:
TSP Talk Longer-term: +7.49%
G Fund = +2.39%
F Fund = +1.08%
C Fund = +6.95%
S Fund = +9.59%
I Fund = +10.98%
Diversified (20% in each fund) = +6.20%
While we did not get
that correction, we did have an opportunity in late February / early
March but I really thought the 6% drop would evolve into our first 10%
correction in four years. That turned out to be wishful thinking
as the market rebounded quickly and we missed our chance.
Another minor dip developed in June and we are still consolidating in a
trading range from that "pullback", but again, we're only talking 3.7%.
If we are going to eventually get a healthy 10% cleansing, it will start
as a small dip that turns larger. Is this it? Can the slow summer
months give us that cleansing, or is the market just too strong?
I wish I knew. It isn't really clear but the answer is forming in
front of us. From a technical standpoint, that answer will likely
come from the chart. If the S&P breaks above the recent double
top, we'll likely resume the rally. If instead the support fails,
we will likely get a decent correction.
Chart provided courtesy of
www.decisionpoint.com
We start the 2nd half of 2007 with the three legs of the market, psychology,
valuation, and monetary conditions, in good shape. Valuation has been the real backbone of the market the past
couple of years. With interest rates so low, it made stocks a much
better value over bonds and cash. According to
Standard & Poor’s, the S&P 500 earnings estimates for 2007 is
$94.09, and 2008 is $105.90. With the S&P 500 now at
1503, that gives us an
earnings yield of about 6.3%. With the 10-year Treasury Note currently
yielding 5.03%, that makes stocks about 20% undervalued and makes for
a positive investment environment.
Valuation and psychology, the refusal of the herd to get overly bullish,
is what is keeping the market from correcting. The current 1 to 1
bulls to bears ratio in the AAII Investor Sentiment Survey is just too
bearish. It likely means there is plenty of ammunition (cash) on
the sidelines to keep a dip from turning into something worse. The
last time the herd saw a 2 to 1 bulls to bears ratio, which would give
us a short-term sell signal based purely on psychology, was just before
the February 6% pullback. Perhaps a healthy rally during the 4th
of July week will get the herd more optimistic about stocks.
So, the song remains the same for the 2nd half of 2007. We have a
very positive long-term market environment but the market has come a
long way without much in the way of a correction. I believe we
could see a little more selling this summer so keeping a small amount of
cash here is still the plan. When the time is right, we will move
to a 100% stock allocation once again.
Good luck!
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