One can only imagine the pain distributed to short sellers over the recent 24 months. Whether dating from March 2009, middle of last August or early last November, stock prices and averages have pressed ever higher, and in a grinding and unspectacular fashion, entailing images of a slow motion reel. It must be, for most of the time, unbearable for those not on board.
Take heart --- a give back of modest but noticeable proportions is likely to unfold in coming weeks. Unlikely enough to recapture the Spring 2009 lows or even the best entry levels of last Summer, but a worthwhile price markdown enabling those having missed the recent move to refresh the boarding pass and locate a good seat for the next takeoff.
Consensus estimates have by now pushed Full Year 2011 S&P 500 earnings close to $93 a share, while a range of $102-105 is quickly emerging as the agreed upon figure for next year. When viewed this way stocks hit the finish line on Friday February 11 at just over 14 Times the current year, closer to 13 on the next. The S&P multiple has been higher and, provided the Yield-to-Maturity on 10 Year Treasuries does not pierce 4.50 - 5.00%, a multiple expansion to 15.-15.5 times forward earnings is a plausible assumption. Presto! 1400 SPX this year, 1520-1550 by 2012, enough to dance around with the late 2007 former highs.
So Where's the Downturn? What might be wrong with this cozy sounding picture? In the orthodox fundamental sense, I believe nothing, again retaining the assumption on bond yields and the always pivotal belief that National political trends remain on a healing track. The immediate hurdle is nothing more formidable than price, specifically current price stacked against a broader perspective. Using 50 and 200 Day moving averages, here is how percentage differences stand today and contrasted with what ruled just a few years ago.
S&P % +/- % +/-
Date 500 50 Day MA 200 Day MA
04/27/07 1494.07 ( 5.0) 8.34
10/12/07 1561.80 ( 4.5) 5.90
02/11/11 1329.15 4.3 14.46
The 2007 dates were selected because they roughly formed a double top that year, with Bear Stearns, Lehman, Stimulus, TARP, QE and all the rest of it lurking around the next corner. Note that in that era as stocks made their highs the Index still rested below its 50 Day Moving Average. The contrast with today is, in my estimation, striking and worthy of note. In this and every sense other than the P/E ratio stock prices are simply, however momentarily, out of hand.
How extensive the coming retreat? I always think it best to take things in likely stages, rework the assessments if and when the stages are reached, go on to the next inspiration. As simple arithmetic mid point between the SPX 50 and 200 Day averages is 1218. It seems as good a range as any to postulate the initial downturn target. It represents a give back of only 8.4%, not enough to destroy the World but good enough to allow risk capital to enter the fray at slightly more advantageous terms.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
