EXPECT CORPORATE PROFITS TO FALL 5-15% ANNUALLY (Hussman
Funds)
“From the standpoint of long term stock market returns,
the most important feature of valuations to note at present is the extreme
level of profit margins, which are more than 70% higher than historical norms.
This is well-explained by the fact that the deficits of one sector must, in
equilibrium, emerge as the surplus of another sector…Though the actual course
of corporate profits will be affected by numerous factors, including the extent
to which extraordinary fiscal deficits normalize, we would expect corporate
profits over the coming 3-4 year period to contract at a rate of somewhere
between 5-15% annually.” – John Hussman, PhD, Weekly market Comment for 23
September 2013. Commentary at…http://www.hussmanfunds.com/
We also have more companies suggesting that forward
profits are expected to fall. (See
latest FACTSET Earnings Insight, excerpted below.).
FACTSET EARNINGS INSIGHT, September 20, 2013 (Factset)
“At this point in time, 107 companies in the index have
issued EPS guidance for the third quarter. Of these 107 companies, 88 have
issued negative EPS guidance and 19 have issued positive EPS guidance. As a
result, 82% (88 out of 107) of the companies that have issued EPS guidance for
the third quarter have issued negative EPS guidance. This percentage is consistent
with the percentage recorded in the previous quarter at this time (81%), but
well above the 5-year average of 62%.”
Excerpted from the FACSET Earnings Insight report for 20 Sep 2013.
Now the market is considering whether the FED
continuation of QE is good news or Bad news
FED’S MESSAGE A BAD SIGNAL FOR U.S. PROFIT GROWTH
(Reuters)
“The euphoria with which investors in the U.S. stock
market greeted the Federal Reserve's decision to stick with its easy-money
policy has begun to evaporate, as the message the Fed was sending about a
less-than-stellar economy sinks in. An economy still in need of a safety net may be
too weak to produce robust earnings
growth, meaning that the Standard & Poor's 500 valuation, now at its most
expensive on a price-to-earnings basis since 2010, becomes harder to
justify.” Story at…http://www.reuters.com/article/2013/09/23/us-usa-earnings-fed-analysis-idUSBRE98M04S20130923
My guess is that smart-money agrees with the above
Reuters piece: it is bad-news, for the short term anyway. That guess is based on two issues: (1) late-day-selling
that has been down over the last 5,10, and 40-day periods; (2) the high volume
on the down Friday. The market didn’t
change all that much for the huge amount of shares traded. Friday looked like the smart-money sold the
“bag” and now the new buyers are left holding it. I still think the market needs to re-test 1573
or may trade down to the 200-day moving average, now at 1584. The wild card is
the FED. Can the FED keep the markets propped up if earnings do deteriorate as
predicted? I doubt it.
I remain in the minority with that opinion.
Here’s the opposing comment from a trader board: “Since
nothing has changed QE wise, I'm thinking the same pattern of buy the dip is in
full effect. Those dips have not been
allowed to happen more than 3 to 5 day in a row…” Apparently that opinion is wide spread; my
sentiment indicator was 65% bulls at Friday’s close based on dollars bet long
or short in selected Guggenheim/Rydex funds.
MARKET REPORT
Monday, the S&P finished down 0.47% to 1702 (rounded) at the close.
VIX rose 9% to 14.31 so the options boys woke up.Monday, the S&P finished down 0.47% to 1702 (rounded) at the close.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks
advancing on the NYSE fell from 58% to 54% at the close. (A number above 50% for the 10-day average is
generally good news for the market.)
New-highs outpaced new-lows today, Monday,
leaving the spread (new-hi minus new-low) at +44 (it was +129 Friday), but the
10-day moving average of change in the spread is now minus 85.
The Internals are neutral to negative on the
market in the short term.
NTSM
Monday, the overall long-term NTSM analysis remains
HOLD at the close.
MY INVESTED POSITION
I remain about 20% invested in stocks as of 5 March (S&P 500
-1540). The NTSM system sold at
1575 on 16 April. (This is just another
reminder that I should follow the NTSM analysis and not act emotionally – I am
under-performing my own system by about 2%!)
I have no problems leaving 20% or 30% invested. If the market is cut in half (worst case) I’d
only lose 10%-15% of my investments. It
also hedges the bet if I am wrong since I will have some invested if the market
goes up. No system is perfect.
