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Still Building a Bottom


Stocks in no-man's-land need an upside breakout.

No Man's Land

Now that stocks have rallied quite nicely and earnings news suggests that maybe a global economic (and societal) Armageddon has been forestalled, investors need to evaluate equities from both a fundamental-analysis and technical-analysis perspective. And from where I sit, stocks are in a no man's land - slightly above fairly valued and lacking that third leg of the bottoming process I noted in last week's article (Building a Bottom: A Three-Part Process): the upside breakout.

From a fundamental-analysis perspective, only the most optimistic bulls would argue that a P/E above 15 times is fitting for the economic times we're in. Yes - it's a good thing that Wells Fargo (WFC) reported such fine results. And it's all to the good that the G20 meeting went fairly well - especially the $1 trillion headed the IMF's way. But even the much-improved implied $60 operating earnings for the S&P 500 for 2009 (versus the doomsday outlook for a number closer to $40) gets you to a reasonable best case scenario of 900 for the S&P 500 (15 x 60 = 900). At today's price of 845, that means only an additional 53 points, or 6.26% of upside remains, assuming the historical return of 12% for stocks from any point in time.

From a technical-analysis perspective, it's interesting to note that the fair value 900 number for the S&P 500 is right around its upside breakout level - a debatable point, as the accompanying chart could be interpreted as either 880 level of earlier this year as the key number, or around the 1000 level reached last fall (which just happens to be right around its 200-day moving average). Either way, without that third leg of the bottoming process in place, it's hard to get too enthused about big moves in below-key-price points.

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No positions in stocks mentioned.
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