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Excel Acceptance, LLC, (EA), is a specialty financial services company providing alternative funding availability to lease and loan portfolio sellers. EA is a full service funding facilitator of both large and small portfolios in addition to the individual lease or loan originated by both... More
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  • Ross Aldridge In Las Vegas Nevada Details Why The Stock Market Has Not Peaked Yet! 0 comments
    Jul 13, 2014 1:20 PM | about stocks: SKF

    Ross Aldridge in Las Vegas Nevada details why the stock markets have not peaked yet! The Markets are close to the 17000-17500 range that we predicted in November 2013 but a triple above the 17,000 mark is required in order to perfect the Fibonacci Sequence.

    Has the stock market, which continues to reach new highs, topped out? Not yet. Here are four reasons I believe the stock market hasn't reached its peak.

    After a five-year run-up (albeit with some downdrafts), bears say that it can't go up much more. At my firm, many clients are asking this very question. As the Dow Jones industrial average yo-yos around its recent milestone of 17,000, remember that eventually the pessimists will be right. All markets dip.

    While I don't presume to predict the tops or bottoms of markets, these factors are worth considering:

    1. Rolling correction: Value stocks replace growth stocks. I believe the markets are in the midst of a rolling correction, hidden by the strength in the Standard & Poor's 500 and Dow Jones indexes.

    Larger companies, which have the greatest weightings in these indexes, are obscuring what is truly going on beneath the surface - a rotation out of more expensive growth stocks to more reasonably valued stocks. You can interpret this rotation in one of two ways: Either this is healthy or there is more trouble to come.

    From what I see, this looks healthy -- with investors moving out of the most expensive speculative stocks like Twitter (NYSE:TWTR) into larger, less costly companies, like Exxon Mobil (NYSE:XOM). This year, micro-blogging company Twitter is off around 44% and energy giant Exxon has advanced almost 3%.

    The price/earnings ratio for Exxon is around 14, and also below that of the S&P 500; this means Exxon is relatively inexpensive, and it pays a 2.7% dividend. Twitter, with no earnings, has no P/E, thus you pay almost $38 per share for red ink - and the hope that the company will some day turn a profit.

    You can see this in the year-to-date returns. Returns are strongly positive in large- and mid-sized companies (think of those in the S&P and Dow), but broadly negative for smaller companies. The S&P is ahead almost 6.3% and the Dow is up 2%. But the Russell 2000, which tracks small-capitalization stocks, is down almost 1%.

    2. Earnings: Investors may pay more for less. Last quarter's earnings were decent but not great. The earnings growth rate in 2014's first quarter was only 2.1%. And out of the 490 S&P 500 companies, 74% reported earnings above expectations with only 53% reporting sales above estimates. Looking forward, 82 companies issued negative earnings per share guidance while only 27 predict positive earnings for the second quarter, according to Factset Earnings Insight.

    For the market to move much higher, we will likely need accelerating earnings in the back half of the year. Without a big increase in earnings, higher stock prices can only happen if investors are willing to pay even more for current, tepid earnings.

    3. Consistent mid-term election year market conditions. Also, historically the second and third quarters of a mid-term election year are weak and choppy for the markets. This is consistent with what's going on now and suggests higher stock prices in this year's final quarter.

    4. Stable credit markets. The credit markets aren't yet flashing any signs of stress in the system. Credit availability is very good, especially for non-investment grade companies that can access credit at very low interest rates. As long as corporate credit is readily available and markets believe that companies can repay their debts, this should provide a stabilizing effect for the equity markets.

    As stocks climbed, the average yield on junk bonds (as measured by how much higher it was than that of ultra-safe Treasuries) came down. That is an expression of optimism: Investors lately demand lower interest from riskier corporate debt.

    The rotation we see is healthy for the stock market. It's letting the market digest last year's rapid increase in stock prices as earnings catch up to valuations. For now, the market appears to be in wait-and-see mode about future earnings and increasing U.S. economic growth.

    As such, I expect choppy markets for the next couple of months. Ultimately, this may turn out to be a year without clear direction, but one where equities still generate mid-to-high single-digit returns. And that portends higher stock prices, not a peak.

    MORE: Ross Aldridge in Las Vegas Nevada

    Disclosure: The author is long SKF.

    Themes: GS, NUE, X Stocks: SKF
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