Wow. Great open, then a dip into the red ink, and then a bounce back into the black - and all in less than two hours worth of trading. And here's the killer..... I don't think we're past all the insanity yet!
I know that's the last thing you wanted to hear, but it's just the way it is.
To the NASDAQ 100's (NDX) credit, it is back above the 25x5 DMA today, and on its third day above the 3x3 DMA. On the other hand, there's a giant gap left behind from Wednesday's pop, and the market's been moving higher on nothing but momentum since then; how much gas is really left in the tank?
Fact is, the market needs to survive a real test first before we can take this bullishness at face value. And, I just don't see that happening yet. This is a dead-cat bounce, and not a rally born from newfound optimism on stocks. Volume on the way up's been way low.
Anyway, with not much likely to change between now and the end of the day/week, I figured we'd take a little time to do something for you we don't get to do often enough... take a step back and look at the bigger picture, and earnings in particular.
First and foremost, the S&P 500 has easily topped its earnings estimates that were out there before earnings season started. In late March, the pros were thinking the S&P 500 - if it were a company - would earn about $23.86 per share for Q1. Now with a little more than half the S&P 500's companies having reported, the index is on pace to earn $25.38 for Q1, which is 6.3% higher than expectations.
Freakin' ridiculous, though we've all seen it before. The media screams 'gloom and doom', scaring investors out of stocks, and then we see that things aren't nearly as bad as they were supposed to be. Whatever.
Just keep in mind for next time around how it's very rare for the market to not have a good earnings season, even if only because the entire industry sets the bar so low before earnings season kicks off. That's part of the reason stocks struggled in early April - lowered guidance. Turns out things aren't that bad after all, and stocks have been feeling a little bullish pressure as a result. It's just part of the dance, you know?
But what about today's market weakness? What about Ford's (NYSE:F) huge shortfall? What about Spain? Oh yeah, I see all of that. It's like the newsletter was talking about on Wednesday though - you can either trade, or you can invest. If you're a long-termer, than the whole earnings picture matters, and the day-to-day stuff doesn't. If you're a short-term trader, than the whole earnings picture doesn't matter, and the day-to-day stuff is the key. You really can't blend the two, however. The problem is, the media likes to convince you to be a trader using the bigger earnings picture data. It rarely works out. [Reality check: Sorry, but Spain's debt woes and Ford's pitiful results last quarter aren't signs of sweeping trouble for everybody else.]
Now, I said all of that so I could show you the nearby graphic. It's a look at the S&P 500, the trailing and projected earnings by quarter, and the subsequent P/E ratio.
If you're strictly a short-term trader, you don't care. If there's any part of you that's a true investor though, then you'll want to take a look.
Are you still with me? Good, because the bottom line is, it's good news. Not only is the market on track to post record earnings for last quarter (something nobody expected), but the smart folks at Standard & Poor's say the march into record-earnings territory is going to continue through 2013.
At the same time, the market is still at rock-bottom, historically low valuations. The S&P 500's trailing P/E is only 14.12, which is at the extreme low end of its 20-year range.
I know a lot of people say that the P/E ratio doesn't matter, and I don't not understand what they're saying. Thing is, it doesn't matter UNTIL IT DOES. It mattered in 1995 when the P/E reached a low of 14.4, and stocks nearly tripled in value over the next five years. Just sayin...
Either way, the bullish earnings outlook isn't going to amount to a hill of beans in the near-term. We're just going to have to burn through all this volatility before the bigger trend resumes, which - unfortunately - may mean more downside before it's all said and done.
What's the bigger-picture for the economy right now? Here's a quick look at last week's big economic news, and the major data in the pipeline for this week. Let's start with last week's numbers.
It's going to be a stunningly busy week this week, and all compacted into four days instead of five. There's no way we can preview all of it, so here are the biggies to watch for.
Think the employment situation is getting better? In some regards it is, but the numbers and suggestions you're getting are misleading. It's not that they're wrong - it's just that they're incomplete in that they (1) don't show you how many people are actually working again, and (2) the continuing unemployment claims numbers you're hearing don't actually count everyone making unemployment claims.
The truth (the whole truth) is out there, but it takes some serious digging. Here's a look at a couple of the ugly truths with the nation's employment report card, as of last week. Just to put it all in the needed perspective, we've even charts several years' worth of this data. See below, under the commentary.
1. It is true that the initial claims levels have been falling for quite some time. This number peaked at 656K in February of 2009, yet is now at 385K as of last week. The implication is that more folks are going back to work, but that's not actually the case.
The reality is, far fewer Americans are working now than they were in late 2007 when the economy peaked, and even fewer are working now than when the economy bottomed in March of 2009. The seasonally-adjusted number of U.S. workers topped at 147 million in December of 2007, was at 141 million in March of 2009, and rolled in at 139 million last month. Things are NOT getting better on the jobs front.
2. It's also true that normal (insured) continuing claims have fallen from peak levels of 6.36 million in March of 2009 to the most recent reading of 4.28 million. The trouble is, that calculation excludes anyone receiving emergency benefits.... unemployment benefits that have been paid for so long, they're beyond the normal projections and requirements of the insurance plans.
The reality is, a total of 8.77 million people are receiving some sort of unemployment benefit; only about half of them are being counted in the government's official weekly total. And, it still doesn't include anyone who is still unemployed but no longer eligible for benefits of any kind. Granted, the total figure is still well under the January-2010 peak of 12.0 million. Remember though, there are 8 million fewer people working now than there were in late 2007, and 2 million fewer employed people than in early 2009.
A reason to be bearish on stocks? No, sadly it isn't a reason to bet against the market. Corporations have learned to run lean (without as much staff), and profits are legitimately improving... and have been for several quarters. Not only do they not need as many employees, they don't even need as many healthy consumers to pump up the bottom line. It sure would be nice though, to see ALL of these employment trends change for the better. It's not getting better nearly as quickly as the flash-in-the-pan looks imply.
Here's the chart.
I'm not entirely busting Yahoo! Finance's chops, because both headlines are essentially true. For headline-skimmers though, you have to wonder if anybody really knows anything anymore. According to Fidelity, 401K balances have reached a ten-year high (a little shy of the bursting of the dot-com bubble). The Wall Street Journal says retirees don't have enough in their accounts to see them through to the end. Hmmm.
To be fair, it's not apples to apples. It's not apples to oranges either though. Maybe it's red apples to yellow apples?
Anyway, while the Fidelity number is true, it doesn't say whether or not that's because smaller investors are no longer saving via a 401K, nor does it say if the calculation excludes anyone who cashed in a small 401K to live on in the meantime; I suspect it does.
Likewise, the WSJ numbers don't comment on "now-versus-then"... only on the fact that what pre-retirees have isn't enough. And, I think it's safe to assume the reason IRA balances are at such high levels is that those approaching retirement are skewing the number much, much higher... but those accounts are still shy of the goal line.
The point is, folks are probably socking away as much as they possibly can, yet it's still not going to be enough. How does somebody bridge the gap? They can't, unless they work longer.
Just thought it was interesting how there can be such differing perspectives. Proves that if you look hard enough, you'll find evidence to support your thesis (which is the biggest tripwire out there for investors).
The market may have closed flat last week, but it sure wasn't because there was a lack of economic data to push it around. Indeed, last week was the busiest week of this month as far as economic numbers go.
Too many to discuss them all.... let's just hit the highlights.