Stock Prices Defy Commodity Prices

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February 14, 2013 10:13 AM EST

By Jonathan Barratt

At the moment we can see there is a lot of pulling and pushing on behalf of the market to try and work out which economy will grow the fastest and which economy will fall by the way side. We are comfortable with our assessment so far, that European economic activity will remain subdued, US economic activity will be mixed, and generally positive and China/ India will continue to bounce. However when you discuss the outlook with those closest to the market, traders remain nervous and hesitant to fully commit at these levels.

Why? It looks simple: perhaps it is that the Dow is approaching levels not seen since 2007 and it is hard to buy at the top end of the range and a level of tough resistance; the VIX is trading at historic or seven year lows and looking weak which confirms a level of complacency; and companies in the S&P have an average PE 14.8. If you dig a little deeper on the US PEs you will see that non-dividend paying stocks have an average PE of 35.8 and high dividend paying stocks have an average PE of 17. So it could be argued that if you where long, in some instances it would be wise to take some profits. Further, if we take a good look at other markets, such as the commodity complex, we can find clues that the current rally might not have the legs to be sustained.

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