VERSACE: Warning signs of risk rising for the market

ANALYSIS/OPINION:

The stock market has ground its way higher in the past several weeks despite mounting concerns. Through the end of last week, the Standard and Poor’s 500 index was up 6.8 percent, marking one of the strongest starts to the market in a number of years.

Yet a growing number of concerns have been bubbling up this month. Several economic indicators have been weaker than expected, insider selling has jumped up, on-again off-again concerns about Greece getting funding are once again back on, and fresh questions about the path to reducing our national debt have arisen following the release of President Obamas proposed budget for fiscal 2013. And, lest I forget, gas prices continue to climb.

Earlier this week, January retail sales released by the Census Bureau showed a weaker-than-expected rebound compared to the consensus expectations of economists. Not surprisingly, two categories that showed meaningful sequential increases were January retail sales for food and gasoline, while those for durable goods, such as furniture and building materials, were weaker compared to December.

Industrial production, a gauge of the manufacturing economy, was flat in January compared to December. Also relatively flat compared to December was the National Federation of Independent Businesses Optimism Index, although digging into the data we find that not only was the January level below year-ago levels, but that it remains well within recessionary levels.

According to data tabulated by Argus Research, the number of shares insiders have sold in the open versus those they have purchased stood at a ratio of 5.77 to 1 for the overall market in the first week of February. This compares to a sell-to-buy ratio of 0.81 to 1 in the last week in November. Keep in mind that since then, the market as measured by the S&P 500 has climbed 16.5 percent - even amid concerns about the eurozone and slower domestic growth in the first half of 2012. The last time the insider sell-to-buy ratio spiked was last July, just before the Dow Jones industrial average dropped 2,000 points.

So far, not so good.

As I write this, reports are coming in that eurozone finance officials are examining ways of delaying parts or even all of a second bailout program for Greece while still avoiding a disorderly default. Reasons for the delay include Greeces pending national elections in April and concerns that the country’s debt-to-GDP ratio will not be cut to 120 percent by 2020 as demanded by the European Commission, the International Monetary Fund and European Central Bank. Greeces debt-to-GDP currently stands at 160 percent.

While a number of people, myself included, thought this would have been wrapped up last week, it seems the Greek drama is set to hold the stage for at least a while longer. My concern is that the longer this goes, what do Greece’s debt problems mean for dealing with Portugal, Spain and other countries in southern Europe?

Also this week, President Obama unveiled his fiscal 2013 budget, which calls for raising taxes on the “rich,” cutting defense spending and infrastructure financing. In my view, the proposal was far more of a campaign tool than a fiscal road map. Perhaps one of the greatest concerns was the forecasted budget deficit of $901 billion in 2013.

While that is better than the expected $1.33 trillion deficit this year, the longer budget view does not have the federal deficit getting back below 3 percent of GDP until 2018. We already have heard from the credit-rating agencies that the government needs to get its fiscal house in order and the presidents budget proposal is a long ways away from accomplishing that.

Taken together, all of the above from this week pushes the reward-to-risk teeter-totter more to the risk side for the stock market in my view. Given the slow market grind so far this year on low volume, the best near-term strategy would be to hope for the best but prepare for the worst.

Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on Twitter @chrisjversace. At the time of publication,Mr. Versace had no positions in companies mentioned; however, positions can change.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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