New Highs or Just High?

The stock market has made new highs recently and seems to be exhibiting some very bullish signs. So I’d thought I’d add my two cents on the expectations moving forward.

Looking at the 6 month and 12 month SPY (S&P 500 INDEX) stock charts below, it’s clearly broken out, and seems poised to the upside. It is well above the short term 50-day moving average and the fundamental 200-day moving average, indicating both short term and a long term in-tact bull market strength.



By the way, I’m eating humble pie for my declaration that the bull market was over last year. When it broke above the previous highs, it was a bit surprising, of course. Either the markets know something I don’t, or it’s short term irrational. No way to know which is the case right now.

Looking at the earnings results of the recently completed Q2 quarter, as well as forward earnings guidance for the next quarter, Q3, it doesn’t exactly scream the same bullish theme.

Take a look at the recent SPY analysis report. I’ve summarized the key points from the report:


Key Metrics

• Earnings Scorecard: With 91% of the companies in the S&P 500 reporting earnings to date for Q2 2016, 70%
have reported earnings above the mean estimate and 54% have reported sales above the mean estimate.

• Earnings Growth: For Q2 2016, the blended earnings decline for the S&P 500 is -3.5%. The second quarter
marks the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since
Q3 2008 through Q3 2009.

• Earnings Revisions: On June 30, the estimated earnings decline for Q2 2016 was -5.5%. Seven sectors have
higher growth rates today (compared to June 30) due to upside earnings surprises, led by the Information
Technology and Consumer Discretionary sectors.

• Earnings Guidance: For Q3 2016, 62 S&P 500 companies have issued negative EPS guidance and 28 S&P 500
companies have issued positive EPS guidance.

• Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.1. This P/E ratio is based on Thursday’s closing
price (2185.79) and forward 12-month EPS estimate ($128.11).

Now, beating the expectations may seem bullish, but it’s not. Keep in mind, Wall Street plays the same game every quarter, lowering expectations, then beating them – as if this is supposed to be a surprise.

The important things to look at are the actual year over years earnings – which was another decline – and especially the forward guidance which was clearly dissapointing. Plus, the valuations of a forward estimated 17.1 PE is just damn expensive relative to historical. And I don’t think there is a chance in hell of becoming reality. The trailing 12 month PE of 19.5 is extremely overvalued and the highest since 2010, which was due to the earnings collapse following the 2008 Financial Crisis.

Even more worrisome is the gross margins of SPY companies. The data shows clearly they have peaked and are still trending down. This is nearly always correlated to stock performance in the intermediate to long term.

Bottom line, the real data and the price action of an ever skyrocketing stock market doesn’t add up. It’s a fairly fundamental disconnect.

My best guess at this point is that the market will inch higher until Sept/Oct. Immediate term the market looks over-bought. Unless the world economy suddenly takes off, and Christmas sales look phenomenal, it will correct in October.

I’m sticking to my guns of a major crash by no later than 2017.

Major CEOs have sounded the alarm on the US and global economy. Transports, especially global shipping data is still poor. Nondurable goods sector productivity decreased 4.1% in the second quarter of 2016. Year over year, productivity is down 0.5%.

It’s impossible to have sustainable GDP or economic growth in the face of non-existent, and especially negative productivity!!

But still, markets are hopeful of more government stimulus in the way of the Fed. In this light, data don’t matter – at least short term.

Lessons to always bear:

1. Don’t fight trend; until it turns.

2. Being right – regardless of how supportive the underlying data is – can still leave you wrong when predicting the direction of stocks.

So always hedge. And never be too stubborn to stay fixed to your position when it’s clear you are wrong.

Markets are rarely rational. They certainly aren’t always efficient. And sometimes, thinking logically can be your worst enemy.

Somedays I think either I accidentally inhaled something, or everybody on Wall Street is high on something  really good.