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Wednesday, January 18, 2012

Market Thought... conflicted

Now that we are in the 'earnings rally', I find myself conflicted as to market direction. Here is the situation, as I see it:

1. A systemic risk removed. With a credit event taken off the table, the market was able to rally due to company (ie earnings) fundamentals. The market beautifully pushed past 1300. Great.


2. Earnings growth.  The Global GDP is now projected to be 2.5%. Slower growth.  The SP500 will most likely witness a trailing earnings of 95-97eps after the numbers are reported this quarter.  With a systemic risk off the table, a trailing multiple of 13.5-14 can be justified.  Simple math gives us a target SP500 of 1282 to 1358.

The market has not traded with a trailing multiple of 14 in MONTHS! And with a global GDP of 2.5% SP500 earnings growth will be muted. Conservatively we have to expect 0-5% earnings growth for the year.  Assuming an eps of $100, the market should trade between 1350-1400 as 2012 ends. (There are a lot of days between now and the end of the year.)

Combining 1 and 2 highlights our potential upside, for now.  The above chart and the impressive move in capital market banks suggests the market can test around 1340.

Adding support to the 1340 thesis, is the set up in the 10yr treasury yield. The yield looks like it wants to go up.

A yield rising will give further justification to the 'real' big boys (I am still not a big boy:) to be bullish on the market. (They will say, "managers are selling bonds to buy stock", stuff like that.)

The indicators suggest further upside here, but I am generally cautious due to the potentially limited upside.

(Just not possible to stay as bullish as I was when the market was near 1200 with this macro-economic back drop. I am not like the other momentum whores out there, I will step in when others will not and walk away when others get caught-up whoring.)

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