Thoughts {06.10.15}

Markets have opened higher.  The S&P 500 has experienced 4 straight down days, which is something we haven't seen in months.  In keeping with the low volatility theme, none of these recent declines has been more than 1%.  Since making a new all time high on May 21, the market has lost just under 3%.  You would think based on the reaction to this by the talking heads on TV that we've been in a bear market.

I should mention that the market is up only about 1% now for the year.  I've been wondering if the direction of the most pain for investors, particularly those that actively trade would be for the market to do nothing.  By this I mean we just have months and months now where stocks basically go nowhere and volatility stays constrained.  We've had one sell off this year back in the winter,  but since then stock indices have basically traded in about a 4% range.  Why can't we continue that?  I know that sounds unlikely and I'm not saying that's going to happen, but it is the one scenario that nobody talks about much.

Treading water would help lower the PE for stocks as long as earnings continue to expand.  The four quarter forward PE for stocks is about to roll over in about three weeks.  That number is going to go from around $122 to likely the $123-124 range. Assuming nothing happens in the markets, that we just continue to chop around between now and then, then the PE on the market drops by about 30 basis points for having done nothing.  The ratio compresses in that instance because the "E", the earnings, advance.

Speaking of the "E", the earnings part of the equation, one of the main reasons that earnings declined so much in the past year was the collapse in earnings in the energy sector.  Oil as we all remember fell off a cliff last fall.  But oil seems to have stabilized, if not actually headed higher.  If oil catches a bid in the 2nd half of the year then probability suggests that earnings in the oil patch are too low.  That would likely mean that earnings in the S&P 500 are too low as well on a going forward basis, all things being equal and given what we know today.

*Long ETFs related to energy and oil service in client and personal accounts.  Long ETFs related to the S&P 500 in client and personal accounts.  Please note that these positions can change at any time without notice.