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The Time to Lower Holdings in Expensive Stock?

May 6, 2013

It was another impressive week for stocks with the Dow Jones Industrial Average and the S&P 500 setting new record highs.
-David W. James, director of research, James Investment Research


Conclusions: It was another impressive week for stocks with the Dow Jones Industrial Average and the S&P 500 setting new record highs. The strongest player among the major sectors was easily technology. This is not too surprising as a prime component, the U.S. dollar, weakened which usually suggests a better export market ahead.

Still we would avoid reading too much into just one week’s worth of dollar movement. The general trend in 2013, on a trade-weighted basis, has been for a stronger not weaker dollar. Amazingly, our dollar continues to win the “least ugly” award among currencies. Yes, the Federal Reserve continues to print amounts of money that would make a counterfeiter blush. However the other major players look even more troubled. The Cypress crisis has created distrust by investors holding European assets. China is looking lackluster and Japan is trying their hand at obscene levels of quantitative easing.

Despite the pageantry of stocks trading at record levels there is an unseemly underbelly of concern. Volume, a barometer of the conviction levels of market participants, is sadly lacking. In 2008 we saw the latest end of the bear market. In the years following the market has risen at a breathtaking pace. Typical daily volume was easily over 1 billion shares traded. Not so in 2013. This year daily volume has averaged a sparse 720 million for a reduction of 33%. Higher prices on lower volume are a danger sign.

The employment report is another example of a wonderful icing job hiding a rancid cake. It may look pretty, but a closer examination tells you the truth. Payrolls rose more than expected and the unemployment rate fell. That is the icing. What about the rest of the cake? Examining hours worked and their earnings we find that over the last year employees’ weekly wages are only growing 1.4% over the previous year. Unfortunately, that is not enough to even keep up with a rather mild inflation rate.

Further trouble comes when we inspect the jobs that are being gained. For every one full-time job added last month there were four part-time jobs. Thanks to Washington’s new healthcare law it is considerably more expensive to have full-time positions. The move to part-time work may help corporations in the short run, but employees will have a harder time making ends meet.

Presently our leading stock indicators remain in the unfavorable camp. Although this is not a sign that stocks must decline it does suggest risk levels are elevated and that a cautionary path is advisable. Market tops are often notoriously long lived and this one will likely be no exception. This provides an excellent opportunity to lower holdings in expensively priced stocks.