Having avoided a close below its 200-day moving average and having regained the 50-day moving average, the S&P 500 is suggesting – at least technically – that the weakness that began the year may have passed.  Since dropping by 41 points (2.28%) February 3rd the primary U.S. stock benchmark has settled down considerably and has now posted two heavy-volume rallies in the past three sessions.  What has changed the mood?  It’s hard to pinpoint an exact reason.  I personally believe that the sell-off may have been overdone given the relatively modest deceleration witnessed in the economic data released since the start of 2014.  At the same time, it has been a couple of years since the market was last standing on its own two feet, so experiencing a little shakiness is to be expected.

Unlike the past two years, stocks overall are not cheap.  They are still within a reasonable range of valuation – given fundamentals and interest rate levels – but there is no room for error.  Given our belief that market performance will be driven more by economic fundamentals than Federal Reserve policy – and the richer valuations – it is a good bet that the ride in 2014 may be far bumpier than it was in 2013.  The good news in that type of market is the opportunity to buy dips wherein you add to solid positions at cheaper levels, establishing a higher probability of solid returns.

As we move past the peak of earnings season and get more data from January it will be interesting to see how investors digest the news.  We like to look at the market from both a top-down and a bottom-up perspective to identify new opportunities, so regardless of the headlines we can still find value.

Finally, just a quick comment on my initial thoughts on new Federal Reserve Chairperson Janet Yellen… Her first testimony before Congress delivered no real surprises.  She presented herself as expected: a straight-laced, exacting individual.  The biggest takeaway is the reaffirmation of the Fed’s tapering with allowance for adjustment based on the data.  Her comments did little to negatively impact market performance.  She provides additional testimony today before the Senate Banking Committee.

More thoughts next week, talk with you then.

Jack E. Payne, CFA

Chief Investment Officer