Top Timer Eyes Bull-Bear Debate

05/07/2014 9:00 am EST

Focus: MARKETS

According to Timer Digest, Sy Harding ranked as the Number Two long-term stock market timer of the year in 2012, and the Number One long-term timer of 2013. Here's his latest outlook from his Street Smart Report newsletter.

It appears that both bulls and bears are still waiting on the sidelines, as they have for some months, talking up their expectations, but neither side willing to back their expectations with action beyond brief short-term trades.

The bears believe they know, and tried the downside in January. But their determination was not sufficient to overcome confident bulls coming in to buy the dip. Will the market have more success with follow through to the upside this time?

The bulls base their optimism on expectations that the dismal economic reports in the winter months were entirely due to the weather, that the economy and corporate earnings will pick up for the rest of the year, and justify the potentially overvalued stock prices.

Wall Street firms are very skilled at lowering their forecasts in advance of earnings reports, making sure it’s easy for companies to ‘beat’ Wall Street’s estimates. Probably of more importance than whether earnings beat Wall Street’s easy forecasts, is whether a company’s earnings are growing or in decline.

And at this point, according to FactSet, S&P 500 companies overall expect to report year-over-year earnings declines for the first time since 2012. So, the jury is still out on the bullish expectations for earnings.

However, the bears’ expectations also have yet to make an appearance. The bears base their pessimism on concerns that the stock market has already priced in the optimistic expectations of the bulls, and so, has little upside potential, while it also faces a sizable list of negatives.

The consensus of our intermediate-term indicators remains mixed and therefore neutral, still indicating the market can go either way from here—intermediate-term. But we believe the odds favor the downside, particularly now that the market has entered its unfavorable season.

We have been saying for some time that we expected favorable seasonality and the support of still substantial QE stimulus would keep the bull market going until April or May.

Meanwhile, historically, the market has experienced an intermediate-term correction of at least 10% on average of every 16 months. This market has not seen one since its 19% plunge in the unfavorable season in 2011.

The market is at high levels of valuation often seen at market tops, based on the Shiller CAPE 10 P/E ratio. We are in the second year of the Four-Year Presidential Cycle, which, since 1934, has seen an average decline of 21%.

So far, the question remains whether the winter slowdown was all weather related. More than enough to keep us neutral, and potentially near a sell signal.

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