 |
In
This Edition... |
|
It's unfortunate
that we only have time and space for one newsletter today, as the market
is 'in a place' where we have mountains of important ideas to share.
Fortunately, we were able to condense a lot of information into our normal
amount of words. On tap for the first part of this week are quick looks
at our ongoing breadth and depth analysis, food for thought regarding earnings
season (which kicks off today), and a preview of some important economic
data that's slated for release later this week. We'll post a follow-up
newsletter at the end of the week.
Before we get
to any of that, however, take a look at some of the comments and ideas
that were posted in the blog since out last newsletter.
|
 |
Breadth
& Depth Still Not 'Trending' |
|
|
Incredibly,
as strong as last week was on the depth (volume) and breadth (advancers/decliners)
front, the market's tide hasn't technically changed to a bullish trend;
the only thing last week did was undo the bearish breadth and depth from
the prior week.
 In
other words, last week's surge was just part of an ebb and flow cycle.
Until we actually
see bullish breadth start to exceed bearish breadth - as evidenced by
moving averages of each - and until we see the same for depth, we really
can't expect a great deal more upside.... if any.
Indeed, we can
clearly see two strong technical short-term reasons for last week's bounce
- one, we were stochastically oversold, and two, the indices (all of
them, though we're using the S&P 500 as our example) once again encountered
the lower 50-day Bollinger band that's been a floor several times over
the past year and three months. The nearby chart hints at all of this,
but here's a
full-screen chart if you're looking for more detail and history.
None of this
is to be a decidedly-bearish omen... an important point to make in light
of this week's rough start to earnings season. Indeed, following the
best weekly gain in over a year, one would expect a little pullback
regardless
of how bullish and undervalued stocks really were. So, don't jump to conclusions
if you see a little more red than you'd hope for this week.
Rather, this
is just an acknowledgement that the pendulum swung too far and too fast
in the other direction; this week will likely be needed to bring at all
back into balance - to let the dust settle. That's ok though, as we could
use the time to pay real close attention to how earnings are unfolding.
After all, Alcoa doesn't speak for the whole market.
|
|
Earnings
Season: Setting the Tone Early |
|
|
Speaking of
earnings season, this one is a crucial one, even if for more psychological
reasons than fundamental ones. Fears of an economic slowdown have been
raised over the last two months, fueled by the reality that the stimulus
money is half-spent, yet jobs have yet to be created in a significant way.
Ultimately though,
how
stocks come out of earnings season will depend on whether or not (1) early
estimates are mostly met, and (2) if investors see a little reason for
optimism in Q3 and Q4. That said, it won't take long for conclusions
- even if they're wrong - to be drawn.
 And
what is the 'target' per se? For the S&P 500, earnings estimates
are a reasonable $19.61 per share (if the S&P 500 were a company).
Compared to last quarter's $19.41, that target level seems well within
reach. For Q3 and Q4, Standard and Poor's is looking for an achievable
EPS of $20.70 and $22.01 for the S&P 500.
Even more stunning
is the S&P 500's current P/E ratio (trailing twelve months) of 13.14.
That's
as cheap as stocks have been in years, yet based on current trends
and estimates, the forward-looking P/E ratio is an even more incredible
10.6 (year-end 2011). In other words, valuation certainly isn't an argument
against owning stocks right now. (Click
here for a full-screen EPS and P/E chart.)
So what's
the problem? The future. Or, perhaps it would be more accurate to say
doubts
about the future.
Say what you
want about what's coming, but considering quarterly earnings have been
rolling in between $13 and $19 per share for the index, the outlooks for
Q2's numbers and beyond aren't as ridiculous as many of the pundits have
been suggesting. Yes, the stimulus is half gone - but it's also half not
gone.
And yes, the slowdown is alarming - but that's typical for the second stage
of an economic growth cycle.
Like we said
above though, the key will be the interpretation of early earnings results....
is the glass half full or half empty?
As long as the
typical 2/3 of companies top estimates, and as long as the typical 1/4
of companies fall short of earnings outlooks, investors should be satisfied
and even excited about the fact that stocks are so cheap in a still-strong
economy. 'Should' and 'will' are two different things though, when investor
confidence is as fragile as it is.
In any case,
there's the target and current valuation. Check back later this week for
an early read on whether or not traders are fixated on the rewards or the
risks.
[At the same
time, know that stocks will be appropriately valued eventually. If earnings
actually improve yet stocks sell off anyway, that's an incredible long-term
buying opportunity..... though misery in the short run.]
|
|
Capacity
and Productivity Bigger Than Earnings |
|
|
Finally, though
Q2's earnings - and how investors view them - are a big deal, there's
actually something even bigger and more meaningful to the stock market
in the cue for this week.... capacity utilization and industrial productivity.
 As
we described
way back in 2007, there are only a few economic indicators that are
reliably predictive of long-term market trends (even more so than market-based
indicators). These two numbers are among the few that have such
a bearing.
Every month
since June of last year, both indicators have cranked out increases. And,
stocks have responded in kind. That's pretty clear on the nearby chart,
but here's
a full-screen version all the same, where you can see how the economic
data has coincided quite well with major market trends.
Will June's
numbers break the streak though? Was May's market decline an omen of
what the data will suggest? Possibly. Analysts are looking for the
smallest of contractions in both numbers. Don't freak out though; blips
can be expected from one month to the next. If we see two or more
months of shrinking numbers, then we'll start to adjust long-term
positions accordingly. Until that happens though (if it happens),
let's keep the bigger trend in mind with this information.... even if traders
lose their minds over the data in the short run.
Oh, and
if the long-term/short-term conflict seems vaguely familiar, it may be
because this was the point we were making back on June 26th with our 'Three
things Most Investors Do Wrong At Some Point' sermon. That's also why
we made the point above that a pessimistic response to positive earnings
news is also a huge buying opportunity. [Long-term investors who can
master the short-term tug of war tend to easily beat the market.]
|
Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
