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Monday, July 4, 2011

Market Thought... happy 4th

Happy 4th of July everyone. The markets simply had an awesome week, raising about 6% is 5 sessions. (To use the most played-out line of the week, 'the market gave us fireworks early' :)

A lot of the move was removing the 'systemic-risk' discount seen in the market, that I highlighted prior to the austerity vote. I thought it would see more resistance near the 62SMA, but it simply melted through it.

Looking at the 2011 earnings estimates, we can deduce the market has removed the 'systemic-risk' discount. Recent 2011 estimates has the SP500 at a median EPS estimate of $96. The market has consistently traded with a PE range between 14-15 during this market rally (starting in March 2009). This give the SP500 an estimated price range of 1344-1440. We are already near the low-end of the price range.

I think the positive (global) economic data and company earnings will provide a reason for the market to start trading near the 15 multiple range. IMO, it should get there is a more stable manner.

If the market needed a reason to consolidate, it could be from realization that the discount has been removed, a lack of news, a pretty overbought market and at a solid resistance level.

 Any downside should be limited because of the fundamentals, and the longer-term trend being re-established via the weekly.

With a steadily rising market, we should begin to hear about the decline in the VIX and how that could be an indicator to sell stocks. I think this assessment will be wrong, as the VIX will begin to trade with a new low-end range near 10-11.

A few side notes:

1. IBM - As per my 'forward PE' assessment I modeled IBM to be trading between 172-178 for their next quarter.  Friday was the first time since the 2008 crash that IBM has closed with a trailing PE above 14.5, as well as a high. Further supporting the thesis that IBM is expanding its multiple trading range, and would suggest IBM start trading at the higher end.  It is currently pretty overbought, and I am simply waiting on a consolidation to get back in. I will begin re-entering on any weakness, and go heavy if 170 is ever broken.

2. GOOG - Google is shifting pretty quickly to become more social. I really like the concept of Google+, and when all the services are combined (iGoogle, Gmail, Gchat, mobile, etc) GOOG gets really interesting, really fast.

3. AAPL - Despite its solid move from rock bottom valuations, it is still under-appreciated. Assuming AAPL's new trailing PE is 15.5-16.5 (due to large numbers), my 'forward PE' assessment still gives AAPL a trading range between high 360 to 380 (when factoring in the coming quarter).  But this is being conservative. It should have a trailing PE of 18-19 because Apple still has accelerated earnings two quarters out, and about to release the iPhone 5 in Sept and maybe even the iPad 3 by December.

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