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Wednesday, January 26, 2011

Market Thought... re-assessing

Back in November I assessed the market from a macro-economic fundamental perspective, and the conclusion was to remain bullish until valuations got extended. The thesis looks to be correct with a few changes/additions.

The relatively new threat, as per the Queen of Doom, is the muni defaults. Although there are pretty big heavy weights that do not necessarily see it the way she does. (Makes me think this is a none issue, but time will tell.) The most supportive development for my market thesis is that SP500 companies have been exceeding their estimates in both top line and bottom line.

In November the aggregate SP500 earnings estimates stood around $86 in 2010, and 93 in 2011. With such a strong showing, across the board, I would not be surprised if the actual 2010 eps was around 88 and 2011 is more like 96. (I do not have access to real-time SP500 estimates, and do not produce my own tracking off all the companies.)

If we look at SP500 with a multiple range of 14-15 and earnings at 88, the SP500 should have a range of 1,232-to-1320. If we look at it with the same multiples and earnings of 96, the SP500 range should be 1344-to-1420.

Given the growth seen macro-economically and at the company levels (top and bottom line), I seriously doubt we test 1,232 again. The charts also support this. Within the daily chart, there is support via the 28 and 32SMAs. Then via the weekly, the 14SMA should move up to around 1250-1260, after this week.

The markets are in overbought territory , but given the differential between 2010 market range and 2011, we can easily go to around 1320, which would then merit a pull back on a trailing PE basis. But regardless where the potential pull back would be, when the market pulls back, it should be shallow and the overbought condition should go away sooner.

(To which I will not hesitate to buy back positions I sold due to large appreciations.)

Updated 7:39pm 01/27/2011 - Included a link regarding the muni threat.

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