How much farther can this overvalued bull market run on fumes? Investors are about to find out the hard way.
Below are the factors to watch in the week ahead, as well as trading moves to make now.
The stock market last week continued to drive higher, resulting in the sixth consecutive weekly advance for the S&P 500 and the Dow Jones Industrial Average cruising past 21,000.
Investors were greatly encouraged by President Trump's Tuesday State of the Union Address, which actually contained few specifics. Pundits had set the bar low and the president managed to read a Teleprompter without incident. Hence, his speech was deemed "presidential."
But it wasn't just Trump's overrated performance that drove stocks higher. Fueling Wall Street's enthusiasm last week was the much-ballyhooed initial public offering (IPO) of Snap (SNAP - Get Report) , owner of the mobile phone chat service Snapchat.
Snap began trading on the NYSE on Thursday and jumped 44%, to $24.48, after the IPO was priced Wednesday night at $17 per share. The final tally brings the value of the business to $28 billion, the biggest tech IPO since Alibaba (BABA - Get Report) went public in 2014.
Investor overreactions to political ephemera and the froth surrounding unproven Snap are only two red flags that this bull market is running out of gas.
By historical precedent, U.S. stocks are long overdue for a bear market. The average bull market since World War II has lasted just 52 months. The current bull market, which started in April 2009, is now almost eight years old. Meanwhile, according to the widely followed Cyclically Adjusted Price to Earnings (CAPE) Ratio, stocks in the S&P 500 have only been this expensive during the crash of 1929, the dot.com bubble, and the great financial crisis.
At the same time, projected corporate earnings growth is hardly gangbusters. For the first quarter of 2017, 75 companies in the S&P 500 have issued negative earnings per share guidance, according to numbers released on March 2 from research firm FactSet.
The forward 12-month price-to-earnings ratio for the S&P 500 is 17.9, a level that exceeds the four most recent historical averages: five-year (15.2), 10-year (14.4), 15-year (15.2), and 20-year (17.2).
How should you trade in this precarious market? Reduce your exposure to growth stocks; pocket some profits from your winners that are now overvalued; increase your allocations in cash and inflation hedges; and make sure your portfolio contains at least 5% to 10% in gold.
And tune out the political kabuki theater. Last Tuesday's State of the Union speech already has been overshadowed by the growing Russia scandal involving Attorney General Jeff Sessions and other Trump administration figures. Focus instead on economic data and earnings scorecards.
In the week ahead, noteworthy earnings reports include: Brown-Forman (BF.B - Get Report) and Urban Outfitters (URBN - Get Report) (Tuesday); BlackRock Capital (BKCC - Get Report) and Express (EXPR - Get Report) (Wednesday); Canadian Solar (CSIQ - Get Report) and Sears Holdings (SHLD) (Thursday); and Kronos Worldwide (KRO - Get Report) (Friday).
The week's headline economic report will be the February Employment Situation, due for release on Friday. Keep an eye on the average hourly earnings figure and what it may portend for inflation, consumer spending, and future Federal Reserve actions.
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