Thursday, February 20, 2014

A stock picker's market

The March issue of Money magazine featured an interesting article on technical indicators.  It profiled three leading indicators, including the price-to-sales (P/S) ratio for the S&P 500, the NYSE Advance-Decline (A-D) line and the AAII investor sentiment survey.  The P/S ratio is currently 1.6, which is 15% above its historical average.  This reading often signals subpar returns for stocks ahead, according to the article: “Since 1993, in the three years following a reading of 1.6, stocks have eked out average annual gains of 1%...” 

As for the AAII sentiment poll, the Money article noted that at the end of 2013, AAII “found that only 18.5% of investors were bearish, vs. a long-term average of 30.5%.”  This reading has typically “delivered underwhelming returns the year after such a reading, but not losses.” 

I found the article interesting in light of my current take of the market’s technical profile.  While I see no outright bearish signals in the immediate term, neither do I see an abundance of “buy with both hands” signals out there.  In other words, we could be in for a very pedestrian market performance for a while.  Until the cycles and indicators get back into alignment it will almost certainly continue to be a stock-picker’s market where relative strength and momentum are a trader’s best friend.