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January 2018

Dear Valued Clients and Friends,

Stock prices reflect the combination of corporate earnings and investor enthusiasm. Right now, the global economy is firing on all cylinders. A rare combination of ultra-low global interest rates, low unemployment, low energy prices, pro-business US policy changes, and fairly robust consumer spending has helped push corporate earnings to all-time highs. Investor enthusiasm has also surged, having finally left behind the deep emotional scars of the 2008 financial crisis to embrace a seemingly unending series of all-time high stock prices. Volatility in the stock market has been at all-time lows with every little dip in prices encouraging another round of buying. This convergence of investor confidence and powerhouse corporate earnings has greatly increased the value of company shares both in the US and on overseas exchanges. But are these gains fully justified by improvements in the underlying businesses? Or is another stock market bubble forming? At the time of this writing the Price/Earnings ratio (PE) for the S&P500 is 26.8 versus a historical average of 15.7 (see graph below). The only times PE ratios have been higher have been just prior (and during) the Dot.com crash of 2000 and the mortgage meltdown crash of 2008. While the PE ratio may have its flaws and detractors, it has been a standard measure of valuation since the beginning of fundamental stock analysis. The chart below tells us that, at a minimum, valuations for stocks are stretched.


Despite these high valuations, stocks have continued to advance rapidly in the first month of 2018. We know from experience that valuations are a crude tool to determine the direction of stocks and that elevated valuations alone will not cause a change in their direction. In the late 1990s high valuations persisted for years before stocks crashed. In fact, the rapid rise in share prices became self-feeding as retail investors poured money into stocks driven by a combination of greed and the fear of missing out. It was not until venture capital firms stopped funding money-losing Internet companies that the mania began to unravel. Ultimately the NASDAQ fell 78% in 30 months, the last leg down propelled in part by the terrorist attacks on 9/11.

Why this history lesson? TD Ameritrade reported only a week ago that retail investor participation in stocks had reached a new all-time high, which historically has occurred very late in the market rally. Additionally, the yield curve showing the difference between the yields on short-term and long-term treasury bonds continues to flatten. When short-term rates become higher than long-term rates, it historically signals an impending recession. However, there are few, if any, other indicators pointing to recession on the horizon. From a technical perspective, stocks are unrelentingly bullish, pausing only briefly to gather steam for another leg upward. We are reminded of the phrase, “this time is different,” and how this statement inevitably turns out to be false, especially when referring to stock prices.

As a result, we are somewhat cautious; still invested in stocks and stock funds, but wary of the volatility that inevitably lies ahead after a year that broke records for historically low levels of volatility. Volatility will rise, unnerving a very complacent market and pushing a long overdue stock market correction.

We don’t know what it will be, but something will upset the proverbial apple cart.

Because a big part of successful investing means not suffering debilitating losses, we think the above factors suggest it is the time for heightened vigilance.

As always, we are keeping a close watch ahead for stormy seas and are prepared for them when they arrive. In the meantime, feel free to reach out to us should you want to review your current investments, discuss your 401k, or other company retirement plan.

To future profits,


Don Lansing
Chief Investment Officer.
512-289-0620

Garrett Beauvais
Portfolio Manager
512-796-0233

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Thank you for your time and interest!

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Phone: (512) 255-8722
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MARKETTREND
Advisors, Ltd.
3720 Gattis School Road #800-214
Round Rock, TX 78664-4660



About MarketTrend Advisors

MarketTrend Advisors is an investment advisory firm that specializes in the trend-following strategies outlined in this report. We offer a variety of strategies that can be used to build portfolios to meet almost any investment objective. We divide our strategies into two main groups: "Long" strategies and "Trend" strategies. The Trend strategies follow the trend up or down. The "Long" strategies are typical investment portfolios that usually remain fully invested, potentially raising cash or moving to income-focused investments when the market is weak. We have a variety of "Long" strategies depending on how aggressive or conservative you want to be. These strategies will make their money when the market is moving higher. The "Trend" strategies will provide protection in a down market and add to gains in an up-trending market. By combining the Long and Trend strategies you get all the components needed to build a successful long-term portfolio:
  1. A portfolio invested in the best performing indexes, ETFs, or stocks
  2. Substantial exposure to global growth through international holdings
  3. Protection for your overall portfolio from down-trending markets When the market is going up, you benefit as aggressively as you wish.
When the market is going down, your assets are protected, or even profiting. Over time, you will see returns that exceed the market if only by AVOIDING market corrections and bear markets. By using one of our more aggressive long strategies in an uptrend, you will see even better performance.



Disclaimer
  1. MarketTrend Advisors, Ltd. is an independent registered in the States of California, Florida, New York and Texas.
  2. Other Securities Industry Affiliations or Activities. MarketTrend Advisors, is not registered as a broker or dealer, nor do we have any partners or employees who are affiliated with any broker or dealer. See Form ADV, Part II for official declarations.
  3. MTA portfolio strategies assume risk and no assurance is made that investors will avoid losses. No representation is made that clients will or are likely to achieve profits or incur losses comparable to those shown. Performance results are shown for illustration and discussion purposes only. The performance information has not been audited. However, the information presented is believed to be accurate and fairly presented. All performance figures in this presentation are net of management fees and commissions. Management fees are charged to actual client accounts on a monthly basis. Accounts include both taxable and non-taxable IRA accounts.
  4. Regarding the MTA Blend strategy: This strategy was migrated into the MTA Wealth Builder strategy and closed in December 2008.
  5. Regarding actual performance: Actual performance for all strategies includes all commissions as well as management fees (fees range from 1% to 2%). Actual performance statistics are based on the inception date of each strategy through the end of the last business day of the most recent month listed in the monthly performance section of this report. Starting with Q4, 2006, returns include only assets of Fidelity clients who were fully invested in their respective strategies. Returns before Q4, 2006 include all Fidelity client assets regardless of investment status. Results do not include the assets of clients at other brokerage firms.
  6. Regarding future performance: Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels.
  7. S&P 500 refers to the Standard & Poor's 500 Large-Cap Corporations Index. The index is designed to measure performance of the broad based US market and consists of 500 American companies. This index is used for comparative purposes only. (Data is taken from Yahoo! Finance.)
  8. MarketTrend Advisors is not liable for the usefulness, timeliness, accuracy, or suitability of any information contained in its web site or of any of its services. The user understands that the information given can and will fail to predict the direction and magnitude of market price movements and the user can lose money when using this information.
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