It seems the stock market has recently gotten everything it wanted in QE2, no expiration of tax cuts, additional stimulus and strong earnings reports. Still the S&P 500 is about where it was in April and has made no progress in over a month. Although the market can still break to the upside, the move off the March 2009 bottom has discounted a lot of good news while ignoring all the real pitfalls that may be ahead.
We here at Brotelli Investments believe a significant market top is ahead and should occur sometime before the end of the 1st quarter of 2011. This should bring a correction which will tell us a lot on what is to come the rest of the new year.
We see the biggest risks to the market as: a U.S. housing douple dip, a slowdown in China, and the spreading of sovereign debt fears to Spain and others in Europe. In addition the market is substantially overvalued at 18 times smoothed trendline S&P 500 earnings. Overall, at this point we believe the downside risks far outweigh the potential upside rewards.
Finally, we want to wish you a very Happy Holiday season and a wonderful 2011!
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