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Update 4/5- All Time Highs - And Then A Sentiment Change .....?

  • 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.