You have probably enjoyed a cappuccino or latte at least once or twice in your life. The delicious froth on top of the coffee base is made by whipping milk at a very high temperature and at great speed. My guess is that you drink your latte before the froth dissipates – but if you were to let it sit for a few minutes, all you would have is a simple cup of coffee with milk.If you translate it to the markets, you could ask whether the markets are getting frothy, and if so, will the froth dissipate, leading to a sell-off?
In mid-October, we finally got closure (but once again, no solution) to the budget deficit and the debt ceiling discussions, with all being deferred to a later date. This deferral, however, provided the markets with enough short-term certainty to stage a solid advance for the month, with the S&P 500 up 4.5%.
The S&P 500 is now up 23.2% for the year, with the majority of these gains coming in the first half of the year. Such magnitude hasn't been seen since 1997, which raises the question as to whether profit-taking is in order, or will momentum carry the market higher?
Historically, momentum has won the debate handily. The chart below illustrates this point, highlighting years where the S&P 500 has advanced more than 20% through October, yet continued to push higher through year-end.
That being said, we do think there is quite a bit of froth in the market. Investor sentiment is currently very high, which seems like a good thing, but actually argues for a short-term pull-back. We believe any pull-back will be a buying opportunity, with momentum carrying the market higher into year-end.
With that said, we are concerned about what is in store for the markets in 2014. While we believe we may have moved into a long-term (“secular”), 2014 may present investors with some challenges. We will touch on this in next month’s newsletter. In the meantime, enjoy the autumn, and the upcoming Thanksgiving holiday!
Live well. Invest well.
Information contained herein is for informational purposes only and is subject to various interpretations and time-frames, and should not be considered investment advice. Advice may only be provided after entering into an advisory agreement with Alexis Advisors, LLC (“Advisor.”) Advisor does not assume any legal liability or responsibility for any incorrect, misleading or altered information contained herein. Advisor shall not be liable for the improper or incomplete transmission of the information contained in this communication. Past performance is not indicative of future results while changes in any assumptions may have a material effect on projected results. Third Party Research Disclaimer: Third party research is provided for information purposes only and has not been prepared by Alexis Advisors, LLC. The information contained herein is based upon sources which we believe to be reliable, but no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in the reports. About : Alexis Advisors, LLC is a Registered Investment Advisor with the Commonwealth of Virginia. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account.