The current P/E for the S&P 500
(INDEXSP:.INX) stands at 17x 2013 EPS expectations, which is a multiple expansion of 2 from November 18, 2012. Wall Street's consensus for EPS growth for 2013 is forecasting a 10% increase in operating profits, or $110 per share, up from 2012’s $102 per share. When you strip out financials, the current growth prospects for EPS is actually -2.5%, based upon revised downward guidance quarter over current quarter. According to BTIG, 80% (45 out of 56) of the companies that have issued EPS guidance for Q1 2013 have issued negative EPS guidance. If 80% is the final percentage, the Q1 2013 quarter will have the highest percentage of companies issuing negative EPS guidance since Q1 2006.
A higher multiple indicates investors are gunning for higher earnings on the back of strong economic conditions, within a higher interest rate environment. I challenge this with fourth-quarter GDP growth of -0.1%. An investor’s best move in moments of euphoria and despair is to understand what the data implies within the backdrop of the broader market. By dissecting and differentiating the two, investors are able to conclude value. This was rather obvious in March 2009 and again in October 2011, both long-term buying opportunities.
Let's also consider volume on the broader market as well. The first two trading days of 2013 began with back-to-back 90% upside volume days. History tells us to not bet against a market in the coming three months. The S&P 500 is found to be higher an average of 6.8% one month later 83% of the time, and 12.8% higher three months later 100% of the time, according to Jeff Saut
, chief strategist at Raymond James. Yet since the year 2000, January has not marked the low for the year. Again, this brings to mind the question of a pending correction.
Clearly, the market is expecting better results and animal spirits suggest an increase in valuation. Low-volume markets rise on relatively small buying orders and fall on relatively small selling orders; thin markets in a qualitative connotation of the term are inelastic markets. A 120%+ move with volumes lower year over year -- as we have become accustomed to since March 2009 == is not suggestive of a healthy new secular bull market.
The debate at hand involves the shift out of a secular bear market and into a thriving new secular bull market. Yes, low participation is a key signal for the end of a secular bear market, which is something I have been forecasting to occur in 2013 and into 2014. Yet it is not a signal for the beginning of a new secular bull market. This possible shift is something we will keep at the forefront in the coming year and gauge its viability through time and price. My own forecast is predicated on a final correction from the $1520-1550 offered in my surprise list for 2013 of 10-20%, which will provide investors one last significant long-term buying opportunity. A multi-week close in the S&P 500 above $1575 with volume will signal a new secular bull market lasting into 2028.
Consider the Citigroup Surprise Index (see the chart below), a tool I referred to when suggesting stocks would bottom on May 30, 2012 and make their way toward all-time highs, is now deteriorating and below the important zero threshold. What this means is that -- as the consensus crowd runs back into equities, as witnessed by fund inflows -- caution is warranted in the near-term. Mixed economic data and an earnings season that is delivering weak guidance on the backdrop of beating muted expectations isn’t supportive of the market's current valuation. Elevated oil prices (record prices in a seasonality sense), increased tax obligations, and the implementation of Obamacare will further strain consumer spending, not to mention the looming spending cuts in Washington. I have remained constructive on equity prices since calling for a run at all-time highs in late May 2012 and reiterating the belief that stocks would move towards 1550 in the first 60 days of 2013 on the back of a last ditch fiscal cliff deal out of Washington. We are arriving at these levels and I intend to take a cautious stance while conventional wisdom plays catch up. It is important to note that equity investors should heavily purchase a meaningful correction.
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No positions in stocks mentioned.
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