Stack on Stocks

04/11/2017 2:50 am EST


James Stack

President, Stack Financial Management

While confidence is critical for a healthy economy, bullish media headlines point to an underlying risk: frothy expectations!

During March, the Conference Board's Consumer Confidence Index moved close to levels last seen when the Tech Bubble popped in 2000. 

Both the "Present Situation" and "Future Expectations" Indexes are well above their 50-year averages. This raises the question: Is this rise in confidence a temporary reaction to the election or is this the exuberance that accompanies the end of an expansion? Either way, it's a reason to be cautious.

The Conference Board's Leading Economic Index moved up again in March, confirming that there is no recession on the immediate horizon. Except for a decline in building permits, the most recent data for its ten components showed broad strength. 

When this index moves below it's 18-month moving average, it means that recession risk is increasing, but that risk obviously lies somewhere in the future.

The beginning of March, the Advance-Decline (A-D) Line, which measures the breadth of investor participation in equity markets, was moving in tandem with the blue chip indexes.

Over the course of the last few weeks, however, the A-D Line has strengthened, hitting a new high ahead of the S&P 500. As seen in 2007, this indicator typically peaks ahead of a market top and the fact that it's still moving higher bodes well for additional gains ahead.

Leading economic and technical evidence continues to suggest that this bull market remains intact and likely has further room to run. Yet lofty market valuations make us nervous, and are a valid reason for a moderately defensive stance.

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