The S&P 500 is sitting at a critical level, overtaking the early April high of 1,424 on Tuesday, only to suffer an outside reversal day on the same day and finishing lower, and then closing strongly on the week to close at 1,411.
For the week, the S&P 500 fell 0.50%, the Dow 30 fell 0.88% and the Nasdaq and Nasdaq 100 fell 0.22% and 0.08% respectively. (Late Friday night, a Marketwatch headline noted that Apple won its lawsuit over Samsung as the jury verdict found for AAPL, sending the stock up $11 and change in after-hours trading on Friday, to an all-time record high print. We’ll see what happens Monday morning.)
The Transports fell 1.46% on the week – that index does not look good and looks ready to roll over.
Technical support for the S&P 500 on pullbacks (as we see it) lie around 1,370 and then 1,333 to 1,340.
Bespoke always puts out relevant statistics. Friday, Bespoke published a short blurb detailing the percentage of stocks (by sector) trading above their 50-day moving average as of Friday:
Financials – 79%
Technology – 77%
Industrials – 85%
Energy – 89%
Cons Discr – 69%
Healthcare – 58%
Cons Staples – 54%
Materials – 80%
Utilities – 13%
Telecom – 75%
S&P 500 – 70%
With the exception of utilities, the S&P 500 looks overbought. Typical of this equity market post-2008, when the averbought / oversold statistics get like this, there has usually been a market correction, however at some point the pattern will change, and instead of a correction, we’ll get a rally. When a market pattern gets too predictable, it tends to get anticipated and then arbitraged away.
According to ThomsonReuters, the “forward 4-quarter earnings estimate” for the S&P 500 as of Friday, August 24th was $108.00, down slightly from last week’s $108.07. With Friday’s close at 1411, the S&P 500 is trading at 13(x) the forward estimate with 6% earnings growth expected for the S&P 500 this year, and 11% next year.
We continue to think that the S&P 500 earnings will bottom in this current quarter, and that the 3rd quarter of 2012 will be the trough in earnings for this cycle. We are seeing one positive metric already, but it is too early to put it out to readers. (Stay tuned.)
The earnings calendar is light this coming week, with Tiffany & Co. (TIF) the only one of our companies to report, and that is scheduled before the bell on Monday morning, August 27th. The luxury retail space has suffered a beat-down this year. TIF is down from its high over $80 reached in July ’11, to its high $50’s trading level today, and as much as I like the company and the brand, we dont think there is compelling value to TIF until it gets into the mid-to-low $40’s, which it may never see. For the July quarter, TIF is expected to see 2% revenue growth, but a 14% decline in earnings growth. (See our TIF earnings preview over on www.seekingalpha.com).
Revenue growth is still projected at 1% for the 2nd quarter, 2012. Although just 41% of the S&P 500 that has reported have beaten the consensus revenue estimates this quarter, ThomsonReuters made an interesting comment in Friday’s “This Week in Earnings”, when they stated that, even though just 41% of companies beat revenues, ” in aggregate, companies are reporting revenues that are in line with estimates”. My own guess in terms of reading between the lines is that “currency translation” played a big part to do with the amount of companies that missed on revenues in q2, and that in the aggregate, the revenues misses were not material. Actual earnings still beat estimates bya decent amount – no worries there.
Q3’12 earnings are now forecast to decline 2%, which is in line with the last few weeks. My own educated guess is that by the time mid-November rolls around and we the majority of companies have reported q3 ’12, earnings growth will be positive.
Consensus analyst expectations since the March ’09 market low have consistently underestimated earnings strength when forecasting quarterly earnings since mid-2009. (I’ll try and have more on that next week.)
Trading market update:
* www.forexpros.com has a great economic calendar. Check their website for a what is to come this week, although i suspect everyone will await Ben Bernanke’s comments at Jackson Hole on Friday, August 31, which is the Friday before the Labor Day weekend and one of the lightest volume days of the year. We could see a volatile day in the stock and Treasury markets on Friday.
* Sure seems like QE3 is coming, despite slightly stronger economic data. It will be one last economic booster shot before the Presidential election;
* The large-caps and mega-cap asset classes are starting to outperform. This is the segment of the market that has been dead since 2000.
* Gold and silver got a lot of play this week, particularly by technicians. Be careful however, the GLD is bumping up against its 50-week moving average and its downtrend line from it’s 2011 high. (Wish I could attach a chart. Not the most technologically astute…) Silver, or the SLV is still just shy of its 50-week m/a, but does not look that good. The 12-year bull market in gold and silver could be coming to an end. Will let the charts tell me more. It will be interesting to see how gold does under higher interest rates and stock prices (should we ever see those in our lifetime again.)
* An important tell: one thing we pay attention to is how a stock trades when guidance is particularly good or bad. Two stocks we follow and model quarterly, Applied Materials (AMAT) and Lowe’s (LOW), the home improvement retailer, both gave pretty poor guidance with their recent earngs reports. AMAT actually ended higher on its earnings report day, and despite warning twice in the last 45 days and lowering guidance with this last earnings report, is still trading well above it’s early June lows near $10 per share. LOW closed down $1.50 on its earnings day after cutting guidance, and is now trading above that level. LOW is one of the few housing stocks that has not participated in the housing rally. It is on our radar for sure. Both these stocks have caught our eye in terms of good relative strength despite poor earnings news and guidance. Contrast this with November of 2000, when John Chambers came out and lifted earnings and revenue guidance for Cisco, only to see the stock get crushed in the ensuing months. (Long AMAT – will get long LOW at some point – like it better at $22.50.)
* Speaking of housing, the homebuilders have done really well. The Homebuilder index is bumping against long-term resistance per John Mendelson, ISI Group’s outstanding technician, and John is betting on a breakout after a pullback from here. However from a fundamental standpoint, the homebuilders are still living off the “net operating loss carry-forward” (i.e. tax-loss crack) from the housing depression, and for the four years when all the homebuilders lost gobs of money. Take a look at TOL’s reported effective tax rate from their most recent earnings report. Investors need to adjust for “normalized earnings” when looking at the homebuilders stocks. Like Lennar did last quarter, most of the homebuilders will take a big tax benefit at some point and use up the loss, and then earnings should look far more normal going forward. I suspect this is one reason the homebuilders “intrinisc value” are still below where the stocks are trading, since some research services like Morningstar are normalizing earnings over the cycle. (Morningstar still sports $24 – $25 fair value for TOL, while the stock is at $32.) However, we are still pretty early in the cycle. (Long TOL and LEN) The homebuilder bonds might be a better deal at this point than the stocks.
* Relative performance – Barclay’s and CNBC reported this week that just 11% of hedge funds have outperformed in 2012. This is a tough market to keep up with. I know I am having a hard time in client accounts, keeping up with the S&P 500. Clients dont want to hear excuses. We use a blend of value and growth stocks in client accounts, and do some trading but focus more on long-term investing. The Fiscal Cliff and the election complicate the issue even more this year, since we are telling clients we want to take gains before 2013 and we want to take losses too.
* Talk of a return to the gold standard and not appointing Ben Bernanke to a 3rd term, should Mitt Romney win the Presidency. Both bad ideas in my opinion. Fed Chairman Ben Bernanke was the right guy, in the right job, at the right moment in 2008, when we nearly had a seismic financial event. It is my own opinion, but I think Ben Bernanke has done a great job. However, it is now time to end Quantitative Easing (the monetary training wheels) and let the US economy pedal on its own.
* To conclude. the S&P 500 looks overbought here, but the stock market is a discounting mechanism and it appears to be trying to ferret out the election and the fiscal cliff consequences before we actually see the results. Our three sector overweights remain Technology, Industrials and Financials, with Industrials our favorite. Defensive portfolios have performed the best from a relative and absolute perspective. We looked at a brokerage firm’s model portfolio the other day, which crowed about outperformance, and here were the weightings:
40% – consumer staples
25% – health care
20% – utilities
10% – telecom
5% – consumer discretionary
Interestingly, Apple (AAPL) was nowhere to be found. (long AAPL).
I personally think that is a portfolio that gets crushed with higher interest rates and faster economic growth, but that is just me. With the dividend yield on this portfolio of 4%, it almost becomes a bond proxy.
Thanks for stopping by:
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager