an tSionna {05.16.12}

I don't know if the markets will start a new trend higher today, tomorrow or even next week.  Greece seems to trump everything right now.  I do know that stocks down nearly 5% in a couple of weeks is a pretty good hit and is a significant divergence from an economy that all the evidence shows is still expanding {albeit at a pace that likely doesn't add many people to the employment rolls}.  Here are a couple of things that I do know.

If S&P 500 stocks are going to earn somewhere between 102-105 a share {reminder: we are at 103.75}  then stocks are historically cheap on a 12-18 month basis.  Using last night's close the S&P 500 has a 12.85 PE and an earnings yield of 7.7%.

Bespoke Investment Group {1} was out with a report the other day that said the average trailing PE on the S&P 500 at the start of a bear market was 19.8 times trailing earnings.  Using S&P earnings last year of $97.00 says the market would have to be trading around 1920.  That's nearly 44% higher than where we are right now.   

The news out of Greece on the forming of a caretaker government  likely buys the market some time now.  It would not surprise me to see us work higher now to around mid-July top out and then use Greece as the excuse for a typical late summer sell off!  Not saying that will happen but it would fit the usual market pattern for summer.  

For clarity I will reiterate our current ratings.  Our ratings remain NET MARKET POSITIVE short term which we raised on April 11 and it is the same for our longest term measurements of market strength. We are NET MARKET NEUTRAL intermediate term. You can go here for a definition of what these terms mean.

*Long ETFs related to the S&P 500 in client and personal accounts.

{1} BIG Tips, 05.14.12 Bespoke Investment Group.  {Subscription required to access this article.}