We Continue to be in a Bull Market; 8% Undervalued - Says Elaine Garzarelli
25 Nov, 2013, 10:54 ET
NEW YORK, Nov. 25, 2013 /PRNewswire/ -- "We continue to be in a bull market," says investment advisor Elaine Garzarelli, President of Garzarelli Capital, Inc. Our conservative model says that "the stock market is 8% undervalued, and that is something to be thankful for this Thanksgiving."
"This week our indicators actually rose from last week and the reason was that the Economic Cycle Research Institute Weekly Index (ECRI) rose 2.4% for the week of November 15th. It is telling us the economy is coming back from the government shutdown. That's what we've been waiting for and that's the reason that our indicators have popped up to 80% from 78.5%."
Ms. Garzarelli continues: "A lot of clients are worried about interest rates – if the Fed tapers in December, March, what's going to happen, they are asking. We have found that the level of interest rates is more important than the direction.
"The ten-year bond yield is currently 2.76%. If it begins to rise as they taper, those rates would have to rise to over 4%, closer to 5%, our model tells us, before the stock market would be fully valued on 2014 earnings. And our earnings estimates are 10% below the consensus.
"So everybody's worried about if long-term rates go up, then that's the end of the bull market – but they have a long way to go before the market would even be fully valued.
"To get a bear market, our indicators would have to fall to 30% – and they are currently at 80%. For that to occur many of our indicators would have to decline. The economic cycle indicators which are worth 20% in our composite are ranked neutral. They'd have to go to negative. Our monetary worth 24% and valuation worth 25% are still bullish – they'd have to go to bearish. And our sentiment is mostly bullish but mixed, and that would have to go to negative. So, you know there are a lot of things that have to happen.
"Based on our proprietary model, the stock market currently, on our very conservative 2014 earnings of 111, is 8% undervalued.
"So, people are worried about a bear market, people are worried about a bubble, people are worried about the rise in long-term interest rates, but we don't see any of that now."
Following are excerpts from Garzarelli Capital's Weekly Client Letter:
Indicators: 80.0% bullish
We Remain in a Bull Market
According to Morningstar's data, U.S. mutual funds had their highest monthly inflow since January, of $10.5 billion. International equity funds also had a strong month with $12.2 billion in inflows. Taxable and muni bond funds, however, saw outflows of $17.8 billion in October.
Our proprietary stock market indicator composite rose to 80.0 percent from 78.5 percent. The rise in the ECRI indicator offset the increase in bullish advisors (contrarian indicator). Even with the recent rally in stocks, we remain bullish. Higher long-term interest rates could cause stock valuations to become full. We believe equities would be fully valued if bond yields rise significantly, to around 5.0 percent. Equity performance longer-term is related to the level of interest rates, not to their direction.
Our indicators would have to fall to a level below 30.0 percent to signal a bear market. In order for that to occur many of our indictors would have to decline. Currently our economic cycle indicators (worth 20.0 percent of our composite) are ranked neutral, our monetary (24.0 percent) and valuation (25.0 percent) indicators are bullish, and sentiment is mostly bullish (31.0 percent).
At this point, 95.0 percent of the companies in the S&P 500 have reported earnings for the third quarter, with 67.0 percent beating expectations. It looks like a new operating earnings record is set to be posted and we expect the fourth quarter to even beat that. S&P 500 margins are at a record high of 9.6 percent.
Our P/E model suggests a fair value P/E for the S&P 500 of 17.5X. With our forecast of 111.00 for next year's operating earnings, a 1942 S&P 500 level is fair value, an 8.0 percent gain over the next six to twelve months from current levels.
The number of bullish investment advisors rose a point this week to 53.6 percent. A level above 53.0 percent is considered bearish. The continued market strength caused renewed bullishness for some advisors. We rank this indicator bearish since the current reading showing high levels of optimism is associated with fully invested portfolios.
The Bloomberg U.S. financial conditions index continues to be on an uptrend. This is a good indication that the health of the financial industry is good and that money is flowing well between banks and business consumers.
The ECRI rose this week and is decisively on an uptrend. For the week ending November 15th, it is up 2.4 percent up from 2.2 percent in the prior week. We upgrade this indictor to bullish from neutral. We look to this index to give us early indication of turns in the economic cycle….
About Elaine Garzarelli
Elaine Garzarelli, President of Garzarelli Capital, Inc., is an economist with a doctorate from Drexel University in economics and statistics. She worked for major institutional brokerage firms for over 15 years while perfecting her market and industry econometric timing models, and was ranked #1 for 11 consecutive years on Institutional Investor's "All-Star" team for Quantitative Analysis and was recently inducted into the Hall of Fame. She started her own companies in 1994, and currently runs the "Sector Analysis" fund.
The Ralph and Elaine Garzarelli scholarship is available at Drexel University for women majoring in economics.
Garzarelli Capital does not warrant or guarantee the accuracy or completeness of this report nor does Garzarelli Capital assume any liability for loss of any nature that may result from reliance by any person or institution upon any such information or opinions contained herein. Such information and opinions are subject to change without notice and are for general information only.
For further information, to receive this week's entire Garzarelli Capital Weekly Investment Letter, or to speak with Dr. Garzarelli, please contact Temin and Company at 212-588-8788 or [email protected].
SOURCE Garzarelli Capital, Inc.
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