an tSionna 05.10.12 {Part II}

Here are a few take-aways from the chart I posted earlier:

The rally we experienced from last fall to the end of March is over at least for now.  The S&P 500 traded through its upward trend line in early April, has been unable to recover and rallies have been sold.

The always festering debt crisis in Europe has been largely the catalyst for the latest sell off but another likely candidate is an earnings season that started off with a bang but has been tepid since then.  Typical of the most recent reports the earnings call from Cisco Systems {CSCO} last night where the company lowered its quarterly expectations for the next quarter, blaming slower growth in Europe and slower sales to governments.   This is reminiscent of last year when growth seemed to slow down in the spring, leading to fears of economic contraction.

There is a major level of support slightly underneath where the S&P now trades around the 1340 level.  That support/resistance line has been crossed many times in the past decade and can be traced back to 1999.  Probability suggests that it will act as support again at least the 1st time stocks attack the level.  

Stocks are oversold short term which is indicative of at least some sort of a bounce in the short term.  Our intermediate and longer term indicators are more neutral and suggestive of a market that will need to rest and repair some of the damage from the last month.  This is consistent with how stocks have also recently traded.  A trading range seems to have developed between 1340-1410 on the S&P 500.  Note that it is normal for stocks to at some point pause to digest a large move.  We're still about 25% higher from last October's lows.

While there is no evidence to suggest that the market is ready to take off from these levels to new highs anytime soon, stocks are still statistically cheap.  S&P 500 earnings are forecast to end the year between 100-105 per share.  We are using 103.75.  The price to earnings ratio based on our estimates is 13 and the earnings yield is 7.6%.  Based on our midpoint estimate  of fair value for the S&P for 2012 of 1475, stocks have moved back into a more attractive level of valuation.  This is especially true when one factors in an S&P dividend level of about 1.9%.  This is just what we are seeing from our perch today.  Of course there is a lot of the year left to go so this analysis is subject to change. 

*Long ETFs related to the S&P 500 in client and personal accounts.  Cisco Systems is a major component of many ETFs that we own for clients and for personal accounts.