Market Commentary – August 24, 2009

General Market Comment:    August 24, 2009

 Last week I opened with this comment . . . “The market may have begun a long anticipated correction.  It might be a short one”  It looks like was indeed a short one – only two days.  All the major indexes made new highs for the year on Friday.  The current “rally” or dare we say – “bull market” has seen the S&P 500 rise 51.68% over 165 days.  This is now clearly exceeding the strength and duration of historical “dead cat bounces”.  The bright folks at Bespoke Investment Group were kind enough to produce the following table of bull markets since 1927.

 ScreenHunter_01 Aug. 25 13.24

They shaded the dead cat bounces often noted by market historians that took place in the Depression.  Usually the bears point out that the S&P 500 went on to drop an overall 86% by the time they heard the “thud” in 1932.  To that we should say . . . “So?”

 Rather than be entirely consumed with history – although you all know I am an avid student of market history – we should try to stay focused on the drivers of market activity.  Things can in fact be “different this time”.  What has driven the current bull market and what will drive it forward?

 To over simplify, the answer is of course earnings expectations.  Here is an excerpt from a report prepared by Thomson Reuters this month on the outlook for earnings growth as incorporated in consensus earnings estimates for the S&P 500.

 ScreenHunter_02 Aug. 25 13.24

 

 You will hopefully note the happy consequence of ~185% year over year growth in S&P 500 earnings in Q4.  2010 earnings growth is no slouch either.  Realization by money managers of improving earnings combined with under exposure to equities will possibly create a Three Stooges moment when they all try to get through the door (i.e. get fully invested) at the same time.

I am becoming more persuaded we will not see any material correction (i.e. down 10% or so) as we move toward Q4.  The implication is we won’t see one till Spring 2010.  That sounds aggressive but that is how the facts are laying out. 

Market Commentary – August 17, 2009

General Market Comment:    August 17, 2009

 The market may have begun a long anticipated correction.  It might be a short one.  The weekly leading economic indicators compiled by the Economic Cycle Research Institute have been on a tear of late pointing to a sharp economic recovery – soon.  This would be consistent with the sharp increase in Street earnings estimates – more on that later.  First look at the following chart.

ScreenHunter_05 Aug. 17 09.42 

Here is what the head of ECRI had to say last week . . . “With WLI (weekly leading indicator) growth surging, the odds are rising that the early stage of this economic recovery will be stronger than any since the early 1980s,” said Lakshman Achuthan, Managing Director at ECRI. The rate of growth in the leading indicators is unprecedented in the history of the ECRI data series going back to 1967. 

 The Street analysts are paying attention.  The net percentage of upside earnings revisions has turned up sharply since the end of Q1.  Here is a chart and comments from Bespoke Investment Group.

 ScreenHunter_06 Aug. 17 09.42

 These items are good – very good . . . and forward looking.  Changing earnings estimates are key catalysts for movements in stock prices.

 BUT – the odds favor a short term correction until we can move out on the calendar and start seeing Q3 indications and improving outlooks for Q4 that catch up with the leading indicators from ECRI.  This will not be a reversal . . . it will be an opportunity to reload and be ready for a strong Q4 market.

 

DISCLAIMER

Market Commentary – August 10, 2009

General Market Comment:    August 10, 2009

 The market has refused to pull back much to the chagrin of the trading crowd.  One of the reasons you have all heard about is the strong earnings performance in Q2 – or rather the strong performance relative to expectations.  I include below an excerpt from Bespoke Investment Group that has a look at the number of companies raising earnings guidance.  The percentage of companies raising guidance is the strongest since 2006.  More importantly – notice that we are experiencing the first reversal when rising guidance exceeds falling guidance since the early phase of the 2003 market recovery.

Guidance Turns Positive

Probably the most bullish aspect of this earnings season has been guidance.  After three quarters where companies guiding lower far outnumbered companies guiding higher, the trend has reversed to the positive side. As shown, 8.4% of companies reporting earnings have raised guidance in Q2, while 6.1% of companies have lowered guidance.  Just two quarters ago, 15.7% of companies lowered guidance, while just 2.66% raised guidance.

 ScreenHunter_01 Aug. 10 09.34

 While I remain optimistic for the remainder of the year, I stick by my comments from last week . . . “While there are reasons for optimism remember that August is not usually a good month for the market.  In fact, the Stock Trader’s Almanac tells us it has been the worst month for the S&P 500 every year since 1987.  July was an unusually good month.  No money manager will get fired for protecting profits in August.  They want to go away on holiday with some peace of mind –eh?

 The odds favor a pull back in the coming weeks.  This will not be a reversal . . . it will be an opportunity to reload and be ready for a strong Q4 market.

DISCLAIMER

Market Commentary – August 3, 2009

General Market Comment:    August 3, 2009

 The improving earnings outlook continued to gain support last week as more companies beat the earnings estimates.  In a typical quarter (since 1994) Thomson Reuters tells up only 61% of reporting S&P 500 companies beat estimates.  So far 74% of the 337 who have reported have beaten estimates.

 The following comment and chart comes from the folks at Bespoke Investment Group .

 This week, 699 US companies reported earnings, bringing the overall earnings season tally up to 1,220.  The percentage of companies reporting better than expected earnings this season currently stands at 71%, and with the the bulk of reports now in, it’s most likely going to stay above 70%.  As shown in the chart below, this is one of the highest quarterly readings we’ve seen over the last ten years, and by far the highest we’ve seen since the last bear market began in late 2007.  We’ve now had two straight quarters where the “beat” rate has increased quarter over quarter, meaning analysts overestimated earnings to the downside.  This is a very positive sign for the market at the moment, but it also means expectations for next earnings season are going to be through the roof

 ScreenHunter_02 Aug. 03 10.26

 We shouldn’t be so surprised.  As the following charts from Yardeni Research clearly display, the confirmed upturn in leading economic indicators telegraphed improving earnings and the upturn in the forward twelve month S&P 500 earnings estimates by analysts point to improving business sales and . . . importantly . . . employment.

 

 

ScreenHunter_03 Aug. 03 10.26The government’s monthly LEI data has decisively turned up and so will earnings.  The reported Q2 quarterly earnings for the S&P 500 are up over 40% from Q1.

 ScreenHunter_04 Aug. 03 10.27

Street analysts are raising their estimates.  This action tends to lead actual gains in revenues.  This tool and the actual reported earnings exceeding estimates point to revenues picking up sooner than later.

 ScreenHunter_09 Aug. 03 11.36

Keep all of the above in mind when the unemployment stats are reported this Friday.  Payroll numbers tend to lag turns in earnings and the economy.  We should be near an inflection point.

 

While there are reasons for optimism remember that August is not usually a good month for the market.  In fact, the Stock Trader’s Almanac tells us it has been the worst month for the S&P 500 every year since 1987.  July was an unusually good month.  No money manager will get fired for protecting profits in August.  They want to go away on holiday with some peace of mind –eh?

 The odds favor a pull back in the coming weeks.  This will not be a reversal . . . it will be an opportunity to reload and be ready for a strong Q4 market.

DISCLAIMER