Saturday, January 26, 2013

S&P 500 Rallies to Levels Unseen Since 2007

Its now been more than 5 years since we've seen these levels in the Dow and S&P 500 indices. Not coincidentally, bond yields and the VIX have also reached 5 year highs and 5 year lows, respectively.

Recent data shows bond funds are experiencing the highest outflows, and equity funds experiencing the highest inflows, in years. Is this the beginning of a shift to equities, or is this another case of the retail investor getting back in near market tops?

Looking at valuations, it is clear the market is not overvalued, but it is also clear the market is not undervalued either. Stocks can definitely go higher, but likely only if earnings continue to grow. Attractive investments in the equity space dwindle with each passing day, week, and month. I feel there is too much good news in the market these days, too much exuberance. S&P 500 is up 5.4% in January alone, and I would be very cautious going into February, because markets rarely make their lowest yearly levels in the first day, or month, of the year.

At times like these, it is important for investors to be reminded that the biggest determinant of future returns of an investment, is the price paid for said investment. It would not be foolish to get a little more defensive as January comes to an end.

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