3/26/2015 - Another down day with the Dow Jones down 40 points (-0.23%) and the Nasdaq down 13 points (-0.27%).
Despite the recent sell-off, the stock market remains near all time highs. A stone throws away, so to speak. Yet, according to David Rosenberg, the stock market will have to deal with the following 4 issues going forward.
1. Earnings momentum has slowed. Bottom-up consensus forecasts for S&P 500 operating earnings growth in the first quarter have fallen to -3.1% from +5.3% year-over-year. "The second quarter has been sliced to -0.7% YoY as well, so technically speaking we could be looking at a mild profits recession here in the US – this is down from the +5.9% estimate at the start of the year," he wrote.
Yes, and as I have suggested before, I believe quite a few companies will guide lower in Q1. We already saw that with Intel a few weeks ago. You can find a more comprehensive analysis here Intel (INTC) Guides Down. Are Others About To Follow? Intel was just the first.
2. Valuations are high. The trailing P/E ratio is 20x, compared to the long-run norm of 16x. "It actually is not all that uncommon to see the equity market up in years when EPS growth is flat-ish (as the consensus now believes for 2015) but that requires price-to-earnings multiple expansion.
I have beaten this topic to death here over the last few months. If you take historical metrics into consideration, we are in an overvaluation bubble. Particularly, when you realize that most of the corporate earnings over the last few years have been driven by speculation, stock buybacks and a giant EQ/Debt/Liquidity bubble. At some point the P/E ratio will swing back to the other extreme and you won't want to be around when that happens. I gather that this time is fast approaching.
3. Economic data has been disappointing. The Citigroup Economic Surprise Index is at the lowest level since August 2011, and in that month, the S&P 500 dipped in a way that led some to think the economic cycle was turning.
I don't think the chart below needs any further comments.
The strong dollar is hurting profits. "There is such a thing as too much of a good thing," Rosenberg wrote, and the dollar bull market is not over. He advised investors to avoid sectors that have EPS forecasts below zero, including Utilities (-6.6%) and Telecom (-0.8%.)
I tend to agree. Technicals suggest, at least for the time being, that the dollar rally will continue. I can only imagine how much this hurts multinationals when they report earnings in Q1-Q2. Despite hedging, very few anticipated the velocity of the dollar move over the last 4 months. I believe we will see the evidence of that soon.
In summary: The stock market is incredibly overpriced, by any measure. The economy is rolling over. Earnings multiples are high while the corporates are guiding down. Everyone is bullish and the strong dollar will have an adverse impact on earnings. Yet, I am supposed to believe that this bull market is just getting started, as most market pundits suggest? Again, you don't have to be a genius to figure out what happens next.
This conclusion is further supported by my mathematical and timing work. It clearly shows a severe bear market between 2015-2017. In fact, when it starts it will very quickly retrace most of the gains accrued over the last few years. If you would be interested in learning when the bear market of 2015-2017 will start (to the day) and its internal composition, please CLICK HERE.
(***Please Note: A bear market might have started already, I am simply not disclosing this information. Due to my obligations to my Subscribers I am unable to provide you with more exact forecasts. In fact, I am being “Wishy Washy” at best with my FREE daily updates here. If you would be interested in exact forecasts, dates, times and precise daily coverage, please Click Here). Daily Stock Market Update. March 26th, 2015 InvestWithAlex.com
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