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Caution Is Still Needed After Positive Week

August 13, 2012

It was a positive week for stocks as large and smaller issues both advanced. The S&P 500 has, in fact, advanced six days straight. On the other hand, there is the small issue of volume.
- David James
, senior vice president, James Investment Research

It was a positive week for stocks as large and smaller issues both advanced. The S&P 500 has, in fact, advanced six days straight. On the other hand, there is the small issue of volume. Volume helps to measure the conviction level of traders. The recent advance has averaged a tepid 650 million shares traded which is 27% lighter than normal. This suggests very little conviction by the bulls.

"Earnings season" is coming to an end. At first blush the numbers are encouraging. Bloomberg data suggests over 70% of the companies are reporting better-than-expected earnings. While the confetti swirls and sparkles on Wall Street with this news a more practiced eye has a critical view. Sales are the life-blood for most businesses. Yet only 40% of corporations are beating their sales targets.

Indeed, sales growth seems to be slowing. We track over 8,000 securities. We find, on a year over year basis that sales growth is only 3.3%. This is about 1/3rd the growth we were seeing just a few quarters ago. With the dollar remaining strong we should temper any expectations of higher sales growth ahead.

Further, relying on domestic sales may be a non-starter as well. Many of the different regional Fed districts report manufacturing new orders. The average reading for these new orders is disturbingly in the red and at levels that historically are associated with pending a economic contraction. Neither is the consumer's spending taking off. The latest readings show three consecutive months of diminished retail sales.

Caution is still needed in this environment. Our leading indicators are trending unfavorable. We suggest lowering equity levels for over-invested accounts.