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Independent Financial Advisor / Professional Investor- with over 25 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • Update 4/5- All Time Highs - And Then A Sentiment Change .....?  13 comments
    Apr 5, 2014 7:37 PM
    • S & P- Dow Jones Transports record new all time highs
    • Russell retakes 50 day MA, then retakes the 20 day MA.
    • Selling in the momentum stocks spills over as sentiment appears to have changed dramatically.
    • Dow Industrials come close but Do Not confirm another Dow theory buy signal

    These bullet points tell the tale of what transpired this week. just when I had prepared to signal the all clear with another Dow buy signal , the rug was pulled out from under the market by a quick change in sentiment.. In typical fashion these changes often come with no apparent or underlying reason, making it more confusing for the average investor, including me.

    The key takeaway from the price action we saw last week ? Sit up and take notice to see if this change takes roots , or is it just more profit taking in stocks and sectors that have outperformed. and perhaps the market goes back to business as usual and we see a 'melt up" as earnings season approaches. Let's also "get real" here as the S & P is off 1.3% from the new established all time high .

    Crosscurrents in the 'market story" --

    Don't look now but the emerging markets, are on a tear. Simply stated that means a "risk on" mentality exists and it was demonstrated earlier this week, as new all time highs were recorded in the S & P & the DJ Transports.

    Whenever we get to this point, the next question is always where do we go from here? The emerging market activity and that "risk on" mode doesn't coincide with a severe S & P correction. Taking it a step further, would a broad sell off be in the offing when there are signs the domestic economy is on the verge of accelerating and China is sending out reassuring signals. ?


    So the action in the latter part of the week becomes more baffling..

    On the fundamental side :

    ISI notes its proprietary surveys on employment, trucking activity and capex are all signaling stronger growth. This week's upward revision to fourth-quarter GDP to a 2.6% annual rate was driven by higher consumption and fixed investment, and after-tax corporate profits rose 8% on the year, pushing their share of GDP to their highest in two years.

    All of these are positives going forward and as I have mentioned in other missives the next move will once again more than likely come down to earnings.

    The markets are coming off very good earnings reports in Q4'13


    Looking ahead to the first quarter 2014

    per Thompson Reuters

    With the roll into the new quarter, the "forward 4-quarter" 2014 estimate increased $4.12 this past week to $122.77 from last week's $118.65.

    This bump or increase is normal or expected, although $4.12 is the largest sequential increase that has been projected in a very long time.

    The p.e ratio on the forward estimate given Friday's SP 500 close at 1,865.09 is 15(x).

    The PEG ratio is now 2.33(x), in-line with PEG's of the last 12 - 18 months.

    The "earnings yield" is now 6.58%.

    Q4 '13 earnings for the SP 500 grew 9.9% y/y, the highest rate of growth since 2011. Revenues in q4 '13 grew 1% y/y, with the Financial sector revenues falling 10% y/y thanks to the Health, Insurance and Industrial REIT's.

    The following is complied from various sources to formulate a view on how earnings may shake out in '14 .

    I will add that using this same formula , the 4th quarter 2013 prediction of 10%, was pretty good since the quarter rolled in at +9.9% . I like to follow those that have been correct.

    In q1 '14, the y/y growth estimate for SP 500 earnings is just 1.1%. Factset is on the low end of the range predicting no growth at all due to weather related concerns. I am not in the "low end' camp, and for now will go out on a limb and say we may in fact get 2% and then some ---

    We'll see..

    On that note I refer to a sector analysis from a Thompsn Reuters report -3/28/14

    Ranked from best to worst, the "expected" sector earnings growth for 2014:

    • Telco +15.9% ( Could be distorted by Verizon. Per Factset, if VZ excluded from Telco sector for q1 '14, earnings growth falls from +23.8% to -2%.)
    • Cons Disc +10.1% (still a leadership sector)
    • Financials +9.4%
    • Basic Mat +9.2%
    • SP 500 +8.6%
    • Hlth Care: +8.4% (took a beating in q1 '14 thanks to biotech correction)
    • Technology +8.4%
    • Energy +8.0%
    • Industrials +7.8%
    • Consumer Staples +6.5%
    • Utilities +5.3%

    The sectors which have seen upward revisions to their 2014 earnings growth estimates since Jan 1 '14 are Telco, Health Care, Utilities.

    Bottom line, I believe 9-10% earnings growth may be in the offing for 2014, I am expecting 2014 "final" EPS to be approx. $120 - $122, and if we get that number it will represent a 9%+ earnings growth for the year and will once again be the best rate of growth since 2011′s 15%.

    Putting the pieces together, investors should not lose sight of the fact that with the 8% 2013 earnings growth that was achieved we also had the S & P rise 32% . Now its show me time for the markets and if there is a "hiccup' on the earnings front, the markets will remind us of that fact in a negative way..

    However as I sit here and look at what the market is already saying with another new S & P high , and the liftoff in the EM's and that "risk On" thought process, I will lean to the side of the ship that says earnings will in fact be ok, and accelerate into year end.

    And yet the potential change in sentiment in the latter part has me concerned as it should not be dismissed, It can trump all of the fundamentals on a temporary basis.

    I'll leave all with this scenario to contemplate;

    Take a good look at 1994--it was a mid-bull market year shortly after recession with a pickup in earnings but with interest rates beginning to rise as well.

    In '94, you got 20% growth in S&P earnings but a flat market because rising rates led to a 25% compression in PE multiples. That particular rate hike cycle involved the Fed Funds Rate rising 300 basis points and it took place over 14 months. Once it was completed, in early 1995, the S&P 500 was off to the races for the next five years. Might we see a similar pattern as the naysayers say we are doomed because of impending rate hikes? Is that what the market is already wrestling with now ? Food for thought

    LT investors need do nothing and simply stay the course ..

    Indeed , IF the sentiment has changed and we do see a continuation of last Friday's price action, many "baby"s will be thrown away with the bathwater..

    There will be huge opportunities, for those that can recognize those names.

    Stay tuned, its no time to panic.

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Comments (13)
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  • redrummd
    , contributor
    Comments (158) | Send Message
    F & G - Your article is very thoughtful. I do not always agree with your views of where the market is going nor do I always disagree.


    I do believe sentiment is fickle and I am not as confident as you are about the state of earnings. However, with so many very negative articles floating about currently it is good to see a very sensible outlook that still recognizes the rising potential of a drop which I agree could be large or very small.


    I certainly am not panicking but I am sitting on about 70% in money market funds and the rest in much higher risk trades. Looing for more reasonable P/E's for the long term after going mostly to the money market late in 2013.


    Kudos on the article.
    5 Apr 2014, 11:12 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10717) | Send Message
    Author’s reply » red,


    thanks for the comment , have you considered some fixed income assets like preferreds or perhaps a CEF or BDC to put some of that 70% money fund money to work?


    best of Luck !!
    6 Apr 2014, 09:31 AM Reply Like
  • redrummd
    , contributor
    Comments (158) | Send Message
    F & G,


    No as it has only been months out but since it looks like this market could trade in a narrow band for a very long time - do you have any suggestions as to where I can park the cash without risking loss of capital if there were a significant negative event in the markets?


    I have never been this much in "cash" before so I have done ZERO research on "preferreds or perhaps a CEF or BDC".


    I would go back to 100% invested in equities if there is a large correction.
    6 Apr 2014, 11:41 AM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10717) | Send Message
    Author’s reply » Red,
    if you like ot do your own research , use this site as a start




    it covers the world of Preferreds, MLP's BDC's ,etc..


    the preferreds will offer a haven with less risk to move some of that cash. But i suggest you don't pile in ..


    These issues are sensitive to interest rates so if we do see rates rise their prices will come down a bit.. if u hold for the longer term , its a trade off as u can get 6% on many of these shares.. a nice income stream ...


    Take a look at that site and if you have any further questions drop me an e-mail at stocks4income@usa.com...


    best of luck....
    6 Apr 2014, 01:01 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10717) | Send Message
    Author’s reply » red,
    here's an etf (PFF) that tracks U.S. preferred shares.


    present yield 6.6%


    well diversified ,


    good luck !
    8 Apr 2014, 01:56 PM Reply Like
  • maykiljil
    , contributor
    Comments (962) | Send Message
    F & G ,


    Very good article . Congragulations. I like it. It is very fruitfull article in special times as nowadays for average investors.


    I like the final sentence " Stay tuned, its no time to panic. ".


    Best Regards,
    6 Apr 2014, 11:49 AM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10717) | Send Message
    Author’s reply » MJ,


    thanks for the comment ;)
    6 Apr 2014, 01:02 PM Reply Like
  • maykiljil
    , contributor
    Comments (962) | Send Message
    F & G,


    Today Fear & Greed Index is in below.




    Is it okey?




    7 Apr 2014, 07:22 AM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10717) | Send Message
    Author’s reply » MJ,


    the sell off continues and yes there is more 'fear" out there..


    many of the names that have had good runs this year are being sold off ....


    & at least for today the sell of is spreading to other sectors.


    Time to review Long term positions and see where it may be advantageous to add ... However , its best to wait until I see a turn in specific stocks before acting..
    7 Apr 2014, 12:40 PM Reply Like
  • maykiljil
    , contributor
    Comments (962) | Send Message
    F & G,


    Thank you for answer.


    Yes. You are right.


    Let's wait and watch.


    Best Regards,
    7 Apr 2014, 02:21 PM Reply Like
  • maykiljil
    , contributor
    Comments (962) | Send Message
    F & G,


    Hi! I would like to ask one question.


    Why especially friday (25.4.2014) indexes stocks fall a lot? What was the main reason?


    Can you comment please.


    Best Regards,


    26 Apr 2014, 03:45 AM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10717) | Send Message
    Author’s reply » MJ,


    I will be posting another update later today with my thoughts on the market


    26 Apr 2014, 09:06 AM Reply Like
  • maykiljil
    , contributor
    Comments (962) | Send Message
    ok. thanks a lot.


    it is not urgent.


    I just want to learn in general your ideas about the markets.




    26 Apr 2014, 10:51 AM Reply Like
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