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This article was sent to members via email December 18. You can access that email via the link that follows this article.
By Brian Nelson, CFA
Hi everyone,
I’m getting a bit concerned about the technical backdrop of the market, and while fundamentals certainly aren’t poor, it is changes in future fundamental *expectations* that drive prices.
My book will hammer this point home: if the conversation is about last year’s data and not about how you arrived at your fair value estimate, efforts are lost before they begin. In evaluating the past data, often ambiguous valuation multiples, you’re evaluating something that is non-causal to returns, and therefore cannot be predictive of returns.
Future expectations of enterprise free cash flows, which drive buying and selling activity through the influence of public-to-private arbitrage are what you should be paying attention to. Stocks are pushed to “fair value” because of the ever-constant threat that if they are not, someone will just take the company private to “arb” those mispriced future enterprise free cash flows.
I need you to start looking forward. I’m pounding the table on this concept.
That very important point said, I don’t think there’s any reason to panic, if there ever is a time, but I do believe market volatility is going to start to pick up the next few weeks and into the coming year. Why? As technical support levels are breached, more liquidity and trading may be “freed” and reallocated to strategies aligning more with the current situation.
With low-vol factors not performing as expected and many low-vol arbitrageurs going belly-up following the breakdown in the ETN that collapsed in February, the market may be setting up for something that we’ve never witnessed before.
In any case, no reason to panic, but as more and more technical levels could be breached, the more volatile this market may become. Remember: now almost 60% of trading is either quant or indexing — meaning 60% of the influence on prices doesn’t really care about the price level. Let’s keep paying attention.
Link to original email: http://campaign.r20.constantcontact.com/render?m=1110817109903&ca=5e3b72f1-1292-43eb-ab9e-02b146679dec
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.