4:00 pm ET: The major averages have finally decided to take a step back to digest some of their recent gains. The bears are starting to make their presence known but I don't think they'll be stepping into the drivers seat soon. Why? Well, the VIX is still siding with the bulls and the Dow Transport Index (DTX) remains resilient under pressure. The SPX is closing in on its all-time high of 1576 and a break above that would signal another leg up in the rally. However, a rejection of this level could spell a minor correction. Judging from the previous two consolidation phases in mid-December and mid-February, we could see a 3% cut in the S&P bringing it back to the 1525 level. For this rally to continue, though, we will need to see some consolidation and today's swoon could be the start of it.
On a side note, a guest on CNBC earlier said that he's projecting 2013 earnings on the S&P to be around $113. Using a conservative P/E ratio of 15 for the index gives a target price of 1695 which is more than 8% above today's level. Using a less conservative but still realistic value of 16 gives a target price of 1800, representing an upside of 15%--yowie! Just some numbers to keep in mind should the S&P break above this critical mark.
Trading Notes: Aero & defense stocks attaining lift-off
It appears as if investors believe that sequestration is no big deal, at least when it comes to aerospace and defense contractors. The Powershares Aero & Defense etf (NYSEARCA:PPA) has been in a steady melt-up since last June, gaining over 25% in value. Individual names are also springing to life. Breaking out to new highs today are the following: L-3 Communications (LLL, $81), Orbital Science (ORB, $16), Keyw Holdings (KEYW, $15), Precision Castparts (PCP, $194), and Hexcel (HXL, $30). All of these companies are involved in different areas and I can't really recommend one over the other. Technically, their charts are all very bullish. The "best" chart from a historical perspective belongs to PCP. Since its low of $6 in 2000, the stock has gained an astounding 3100%! Now it may not continue to appreciate at this rate but analysts still really like it giving it a mean recommendation of 1.8 (on a scale of 1.0 being a strong buy and 5.0 being a strong sell). A UBS analyst recently upgraded the stock and the mean analyst price target is $219, about 13% above current levels. Whichever company/companies you choose to invest in, adding one or two of these names would be a great addition to any portfolio, even one that is semi-conservative. Of the above mentioned issues, only L-3 pays a meaningful dividend (2.7%).
Enjoy your weekend and have a great St. Paddy's Day, begosh & begorrah!