Barrons: Why The Rally Can Continue.
Excerpted article in the Trader Section of Barrons from this past weekend. I've thrown in a new chart of the S&P for reference. It's not all that different from the chart I posted on Veteran's Day where we commented on the S&P's double top near 1100. Highlights are mine. Comment at the end.
"INERTIA IS A POWERFUL FORCE. FOLKS typically think of it as keeping an object at rest. But inertia also keeps the momentum behind something that's already moving -- as in the current stock market.
Buffeted last week by conflicting data about the strength of the U.S. economic rebound, stocks still managed to sustain their nice rally, albeit in unimpressive trading volumes.
On the week, the Dow Jones Industrial Average rose 2.5%, or 247 points, to 10,270.47, while the tech-heavy Nasdaq Composite Index finished at 2167.88, up 2.6%. The Standard & Poor's 500 Index tacked on about 24, or 2.3%, to 10,93.48. For those looking for bad signs, the S&P, after several assaults, hasn't yet been able to crack the 1,100 threshold at the close. Higher-than-expected oil inventories led to the one bad day last Thursday, as investors momentarily fretted about the strength of the U.S. recovery.
But that wasn't enough to dent the rally. And it's not enough to change the sentiment and momentum. Some point to the recent outperformance of big-caps over small-caps as a negative -- but so far, that seems more a broadening of the rally than a weakness.
'Last week was a nice follow-through on the previous week's rally,' says Jack Ablin, chief investment officer at Harris Private Bank. A body in motion tends to stay in motion, so until there are widespread data to cause investors to change their outlook, the market's inertia has support, he adds.
.....The good news, {Ablin} says, is that sanguine investors still have a pile of cash. Indeed, market veterans find it hard to believe there's a bubble in the market when equity-mutual-fund flows remain in the red. The little guy isn't all-in yet.
Investors are rapidly getting comfortable with $75 to $80 in earnings per share for the S&P 500 index in 2010. Using a market price/earnings ratio of 15, lower than the current number, a rally past 1,100 by year's end isn't hard to imagine. For now, it doesn't matter whether that profit expectation turns out to be correct -- only that the market believes it.
EVEN NEOPHYTE INVESTORS KNOW THAT November kicks off a seven-month period which, historically, has been better for stocks than May-October. Atypically, however, this May-October period has been impressive, up nearly 20%. Consequently, one might be tempted to expect the rare November-April reversal.
But through Dec. 31, anyway, the rally should hold its own or even improve. Sentiment and momentum are likely too strong to be derailed by the odd negative economic figure......
Other historical data are supportive. According to Bespoke Investment Group, in nearly 90% of the years when the Dow Jones Industrial Average was up by at least 10% by October's end -- as is the case this year -- November and December managed a positive return, with the average gain of 4.2%. The S&P 500 is almost 20% above its moving average for the 10 months through October, another signal of good near-term returns almost 90% of the time.
Momentum supports the market and 'fundamental and technical factors are aligning at a seasonally strong time,' notes Richard Ross, the global technical strategist at brokerage Auerbach Grayson. "The cluster of evidence is in favor" of a good holiday season.
In early 2010, however, if there's a single number that could hurt this rally, it will be the fourth-quarter 2009 U.S. gross domestic product, due out Jan. 29. If not as good or better than expected, history and tradition could be trampled."
Link: {Subscription may be required}: http://online.barrons.com/article/SB125815666383847643.html?mod=BOL_hps_mag
Comment: I think seasonal factors will hold through at least the end of the year. Not only have individuals been under invested in 2009 but so have many institutions. Mutual funds in particular have had higher than normal cash positions because as mentioned above the public has been a net seller of stocks so far this year. I've said for months that earnings estimates would likely have to be revised higher going into next year. Let's play with those numbers a bit. We'll use $77 dollars as a midpoint for S&P earnings going into 2010.
77 x 15 multiple = S&P 1,155 { 5.67% discount to Friday's S&P close}.
77 x 16 multiple = S&P 1,232 {12.71% discount to Friday's close}.
77 x 18 multiple = S&P 1,386 {26.80% discount to Friday's close}.
Now I'm not saying this is going to happen next year as events could conspire to change all of this at some point next year. The economy could weaken in the 2nd half of 2010 for instance. But given what we know at this point and given that the weight of the evidence increasingly seems to show that the economy is starting to bottom, a higher stock market by 2010's year end looks like a realistic scenario that we must incorporate into the playbook. How much higher is anybodies guess and much of that will depend on what happens between now and December 31, of this year.
"INERTIA IS A POWERFUL FORCE. FOLKS typically think of it as keeping an object at rest. But inertia also keeps the momentum behind something that's already moving -- as in the current stock market.
Buffeted last week by conflicting data about the strength of the U.S. economic rebound, stocks still managed to sustain their nice rally, albeit in unimpressive trading volumes.
On the week, the Dow Jones Industrial Average rose 2.5%, or 247 points, to 10,270.47, while the tech-heavy Nasdaq Composite Index finished at 2167.88, up 2.6%. The Standard & Poor's 500 Index tacked on about 24, or 2.3%, to 10,93.48. For those looking for bad signs, the S&P, after several assaults, hasn't yet been able to crack the 1,100 threshold at the close. Higher-than-expected oil inventories led to the one bad day last Thursday, as investors momentarily fretted about the strength of the U.S. recovery.
But that wasn't enough to dent the rally. And it's not enough to change the sentiment and momentum. Some point to the recent outperformance of big-caps over small-caps as a negative -- but so far, that seems more a broadening of the rally than a weakness.
'Last week was a nice follow-through on the previous week's rally,' says Jack Ablin, chief investment officer at Harris Private Bank. A body in motion tends to stay in motion, so until there are widespread data to cause investors to change their outlook, the market's inertia has support, he adds.
.....The good news, {Ablin} says, is that sanguine investors still have a pile of cash. Indeed, market veterans find it hard to believe there's a bubble in the market when equity-mutual-fund flows remain in the red. The little guy isn't all-in yet.
Investors are rapidly getting comfortable with $75 to $80 in earnings per share for the S&P 500 index in 2010. Using a market price/earnings ratio of 15, lower than the current number, a rally past 1,100 by year's end isn't hard to imagine. For now, it doesn't matter whether that profit expectation turns out to be correct -- only that the market believes it.
EVEN NEOPHYTE INVESTORS KNOW THAT November kicks off a seven-month period which, historically, has been better for stocks than May-October. Atypically, however, this May-October period has been impressive, up nearly 20%. Consequently, one might be tempted to expect the rare November-April reversal.
But through Dec. 31, anyway, the rally should hold its own or even improve. Sentiment and momentum are likely too strong to be derailed by the odd negative economic figure......
Other historical data are supportive. According to Bespoke Investment Group, in nearly 90% of the years when the Dow Jones Industrial Average was up by at least 10% by October's end -- as is the case this year -- November and December managed a positive return, with the average gain of 4.2%. The S&P 500 is almost 20% above its moving average for the 10 months through October, another signal of good near-term returns almost 90% of the time.
Momentum supports the market and 'fundamental and technical factors are aligning at a seasonally strong time,' notes Richard Ross, the global technical strategist at brokerage Auerbach Grayson. "The cluster of evidence is in favor" of a good holiday season.
In early 2010, however, if there's a single number that could hurt this rally, it will be the fourth-quarter 2009 U.S. gross domestic product, due out Jan. 29. If not as good or better than expected, history and tradition could be trampled."
Link: {Subscription may be required}: http://online.barrons.com/article/SB125815666383847643.html?mod=BOL_hps_mag
Comment: I think seasonal factors will hold through at least the end of the year. Not only have individuals been under invested in 2009 but so have many institutions. Mutual funds in particular have had higher than normal cash positions because as mentioned above the public has been a net seller of stocks so far this year. I've said for months that earnings estimates would likely have to be revised higher going into next year. Let's play with those numbers a bit. We'll use $77 dollars as a midpoint for S&P earnings going into 2010.
77 x 15 multiple = S&P 1,155 { 5.67% discount to Friday's S&P close}.
77 x 16 multiple = S&P 1,232 {12.71% discount to Friday's close}.
77 x 18 multiple = S&P 1,386 {26.80% discount to Friday's close}.
Now I'm not saying this is going to happen next year as events could conspire to change all of this at some point next year. The economy could weaken in the 2nd half of 2010 for instance. But given what we know at this point and given that the weight of the evidence increasingly seems to show that the economy is starting to bottom, a higher stock market by 2010's year end looks like a realistic scenario that we must incorporate into the playbook. How much higher is anybodies guess and much of that will depend on what happens between now and December 31, of this year.
*Long ETFs related to the Dow Jones Industrial Averages, S&P 500 & Nasdaq composite for client and personal accounts.
posted by CR English at 7:15 AM
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