This is it... Finally! Prepare for the next drop - yay!
Two of my three favored technical indicators flashed big fat sell signals today. Additionally many of the low quality stocks I follow as potential shorts began to act very poorly after posting +20% weekly moves.
Simply put the risk/reward/probability equation now clearly (to me anyway) favors the bears again. While I'll concede the market could see 1030 (my best case target) or 1060 (Goldman Sach's target) by the year end I do not think the market will be able to do that prior to late Q3 or early Q4.
1) The S&P 500 is more overbought according to the Etrade Oscillator (which nailed the 1/2009 top at 930) than it has been all year
2. Williams R% says the market is way overbought in the short term... the williams r is often an early signal and I never depend on it unless a slower more timely signal liek the etrade oscillator or Relative Strenght (RSI) also say the market is overbought
3.) Relative strength (RSI) indicator is not technically overbought (80) but they are around 70 and this is the second highest reading in the last 12 months (only May 2009 was higher - which was close to the end of the 40% rally and the effective end for quality stocks)
The market is not very cheap here at ~14x next year's earnings...
Currently we're 16x this years earnings and about 14x next years earnings.
We're ~18.25 x Goldman Sachs expected earnings for the S&P 500 ($52), per their end of 2009 forecast.
$52 X 18.25 PE = 949 for the S&P 500 ... (we're about 7 points above that)
By the way: Goldman's estimates exclude all the bank losses and 1-time charges - so don't start thinking that after 2009 it gets real easy to increase S&P 500 earnings - it won't! If the economy grows at 2% - BEST CASE SCENARIO I think corporate earnings can grow at 6-9%(with cost cutting and productivity gains).
Let's be optimists: assume the S&P beats Goldman estimates and produces $56 in earnings this year and then grows at 9% next year ... that gets us to $61 of S&P 500 earnings per share.
$61 X 15 PE = 915 for the S&P 500 in 2010 ... uh oh!
LET'S BE EVEN MORE OPTIMISTIC - let's assume the market should ignore next years earnings and look to 2011. Let's assume the earnings grows at 9% in 2011. The S&P would earn $66 per share.
66 X 15 PE = 990 for the S&P 500 in 2011 - sounds good right (at least its a target that is higher than the current market price of 952 for the S&P 500).... but we're forgetting something... we haven't discounted this target for the time value of money over the next year. Let's apply a 7% discount (because I could get a nearly guaranteed 7% yield from corporate debt). After a 7% discount the 990 target is reduced to 920..... YUK AND SOUR GRAPES - THIS MARKET STINKS.
FYI: Normalized earnings for the S&P 500 are probably $65 - $70 without and ignoring peak cycle earnings for cyclicals and it will likely take YEARS to restore earnings to that
LONG JACK - I think it is a cheap restaurant and one of the cheapest stocks that will earn about $2 per share in 2009 (11x earnings). I think it has potential to be a $30 stock not a $22 stock.
SKK -short russell 2000 growth
SJF - short russell 2000 value
TEN - levered auto parts maker that appears to be using some gimmicky accounting in many different places (tax credits, pension plan accounting etc)
AKS - levered steel company that has spent most of the last 20 years below $20 per share and now they have underfunded pension plan by $2B... I think it should trade at a steep discount despite the recovery in steel shipments near term.
TEO - If Argentina goes belly up this is a zero in US dollar translation. All Argentina stocks rallied after a recent election - but the countries debt, currency, and inflation are still a huge concern.
LRCX - not GAAP profitable semiconductor equipment stock - would like to short after earnings ~$30. LRCX will have 30% growth this quarter but it will revert to 15% in following quarters.
F - Ford Motor Co... I believe it goes to zero eventually