The Bullish arguments:
* Early reports suggest the U.S. economic growth has probably slowed to 2.5% annually from its torrid first-quarter pace, which should make Fed governors pause by September.
* There has been a sharp decline in the percentage of stocks on the New York Stock Exchange trading above their 200-day moving averages. That percentage fell to 33% before bouncing to 41%. To quantify that percentage, a level below 40% is usually perceived as "lower risk" for the market.
* The earnings yield on the S&P 500, based on 2006 earnings estimates, remains well above the yield on the U.S. Ten-year Treasury note. Currently the S&P 500 is yielding 6.63% while the Ten-year Treasury note is yielding 5.05%. This signals that stocks are undervalued relative to bonds.
* Full-year earnings estimates rose last week. During the past week, earnings estimates were raised on 104 S&P 500 member companies and lowered on only 70 companies. Over the last month, a total of 600 estimates for the current fiscal year have been raised versus only 368 that have been cut (ratio of 1.63). For 2007, 503 earnings estimates were raised while only 283 were cut (ratio of 1.78). These are both relatively high readings, indicating little chance that earnings are about to collapse.
* For 2007, the median expected growth rate for S&P 500 firms is 12.7%. The sectors with the highest expected growth rates are Industrial Products (16.7%), Basic Materials (16.6%) and Energy (15.3%). The slowest growing sectors are Consumer Staples (6.1%) and Utilities (7.4%).
The Bearish arguments:
* Wall Street investment houses have joined the three-peat party. Barclays Capital, JPMorgan and Credit Suisse all now predict that short-term interest rates will peak at 6% either in late 2006 or early 2007.
* Bear markets occur with great consistency. Just looking at the postwar period, we had bear markets in 1949, 1953, 1962, 1966, 1970, 1974, 1978, 1982, 1987, 1990, 1994, 1998 and 2002. This is sort of like one of those easy math tests that schools give fifth-graders. What is the next likely number in this series?
* One of the most reliable indicators of future price performance over the 2003-2005 bull market was upwardly revised earnings estimates, so this trend of negative revisions at large-cap tech companies (AMD, EMC, INTC) is quite worrisome and shows no signs of reversing. Negative estimate revisions tend to snowball, as analysts never seem to cut enough at any given time, so they have to keep cutting.
* With no net growth in U.S. gross domestic savings since 1998, the U.S. has depended on large and growing influxes of foreign savings in order to finance its domestic investments (housing, factories, capital spending, etc). These influxes will not go on forever and when they begin to slow considerably, this will lead to the downfall of the U.S. Dollar and the U.S. markets.
* In the context of slowing employment growth, a stall in aggregate weekly hours, an emerging widening in credit spreads, and other factors, my impression is that recession risks have increased considerably.