Future Market Valuations Still Cheap

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 |  Includes: DIA, IWM, QQQ, SPY, VXX, VXZ
by: Price Headley, CFA

Last Tuesday it looked like the end of the world (or at least the bull rally). The market was doling out the worst day of the year so far, and in the shadow of a near 18% rally, most agreed it wouldn't take much of a nudge to get a wave of profit-taking started. The dead cat bounce on Wednesday, however, got a lot more traction than we would have expected ... enough to overcome Monday's implosion and push most of the major indices back into the black for the week.

Is the rally just a very, very strong dead-cat bounce that's ultimately going to yield to bearish pressure again (with a lot of pent-up profit-taking pressure)? Or, was Tuesday's plunge just a small taste of what's to come? We'll discuss it below, right after we review the latest batch of economic numbers.

Economic Calendar

When it was all said and done, last week was merely mediocre on the economic front.

From the bullish side of the fence …

* Progress on the jobs front was the big victory last week. Though the unemployment rate didn't budge from 8.3%, we continue to see new (net) payrolls of 200K+ added every month. This is the case whether you're talking about the ADP number or the government's number, and with or without government jobs in the tally. Unemployment claims edged a little higher, but the overall trend is still decidedly downward.

* Consumer credit levels jumped again, and by more than expected. Borrowed money increased by $17.8 billion following December's $16.3 billion jump, easily topping estimates of a $12.0 billion increase.Most of the increase was student loans - again - however. Revolving credit (credit cards) levels actually fell $2.5 billion.

The only bearish red flag was the 1.0% dip in factory orders for January. Even then, it doesn't even fully unwind December's 1.4% improvement. All the rest, good and bad, is on the table below.

Economic Calendar


This week we've got a lot in store, starting with Tuesday's retail sales figure for February. Look for a modest improvement with or without automobiles. We'll also hear from the Fed that day, but it's not likely we'll see any changes in interest rates.

The fireworks don't start again until Thursday, when we get the usual unemployment claims numbers. This Thursday though, we'll also get the producer price inflation data. The unemployment claims numbers should fall in a tad lower, and the PPI number should be a tad higher.

It's Friday, however, that could be a real ruckus - we'll get February's inflation rate then. The pros are expecting a 0.4% increase overall, and a 0.2% increase on a core (excludes energy and food) basis. The current inflation rate now stands at 2.93%, and has been drifting lower for a while. We'll also hear about last month's industrial productivity and capacity utilization…. two biggies that are usually overlooked. Look for a modest improvement in both numbers, which is still a huge step considering the strong correlation between both numbers and the long-term market's direction.

S&P 500

The S&P 500's (SPX) close of 1370.87 on Friday was just strong enough to squeeze out a small gain for the week. The index closed 1.24 points (+0.09%) higher than the prior Friday's closing level - the fourth winning week in a row, though each of those four has been progressively weaker than the last.

Just to set the right tone, let's start this week with the weekly view and then drill down into the daily. It'll help.

First and foremost, do you see anything different about last week's bar? Yes, we saw a lower low, but after Monday's drubbing that was a forgone conclusion. What's even more interesting - in a bearish way - is the fact that we saw a lower weekly high ... the first time in twelve weeks. At the same time, although we've yet to see a bearish MACD crossunder, we are seeing the MACD lines tapering off; the histogram bars (blue) are starting to shrink, confirming the bullish momentum is fading. Take a look.

S&P 500 - Weekly

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The daily chart shows how dramatic Tuesday's dip was. It was the first time the SPX had traded under the 20-day average line since December. Indeed, the bleeding didn't stop until the lower 20-day Bollinger band (gray) was touched that day. But, it did act as a floor, sparking a strong bounce. That bounce, however, shouldn't be seen as all that impressive yet - that upper 20-day Bollinger band at 1379.3 could be just as much of a ceiling. The fact is, the bulls have proven nothing of substance yet.

S&P 500 - Daily

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All that being said, more than anything right now, the market (NYSEARCA:DIA) (NASDAQ:QQQ) (NYSEARCA:IWM) is in limbo and not in a situation where anyone should be making bold, or blind, bets.

While the 20-day Bollinger bands at 1379 and 1341 are going to be instrumental in signaling whatever happens next, they won't be the only key clue. The CBOE Volatiltiy Index (VIX) is also going to be a big deal ... once it breaks out of its channel between 16.7 and 21.7 (red, dashed). The VIX has been range-bound for an inordinately long time now, and something's got to give soon (and likely will). Until it does though, the market's not apt to get much traction in either direction.

We'll keep tabs on it, looking for both bullish and bearish possibilities. But, bear in mind the path of least resistance for the VIX is upward, and the path of least resistance for the market is downward; there's a lot of white space in those respective directions.

Earnings - the Final Score

It's not part of our usual 'trading' fare, but since everything matters, we thought we'd take one last look at the S&P 500's fourth-quarter earnings results. All told, earnings were higher by 5.7% on a year-over-year basis, while they were up 7.1% not counting financial stocks. The S&P 500 earned $23.71 last quarter, which translates into a trailing twelve-month P/E of 14.2. That's still quite cheap compared to the historical average of 15.5.

The question is, of course, what does the future hold? While pessimism abounds, earnings forecasts are still quite compelling. Income for the S&P 500 is expected to reach $105.01 this year (up 9.0%), and forecasted to reach $119.13 in 2013 (up 13.4%). That prices the index at only 11.5 times future earnings.

S&P 500, with Earnings (Trailing & Forecasted) and P/E Ratio

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.