Weekly Market Commentary 6-13-2011
Weekly Market Commentary 6-13-11
Our Emotions or Their Stupidity
Tim Phillips, CEO – Phillips and Company
The S&P 500 is down 6.8% since the end of April and is currently on a six-week losing streak. According to Bespoke Investment Group:
Going back to 1928, this is only the 17th time the S&P 500 has had a six-week losing streak. The last time this occurred was back in July of 2008 during the midst of the Financial Crisis… there have only been three weekly losing streaks of seven or more for the index.
Despite this six week losing streak, earnings forecasts are still fairly loft:
- We’re almost half way through the year and the mean 2011 EPS forecast for the S&P 500 is $95.61. That represents an increase of 8.88% between now and the end of 2011.
- The mean forecast for the 2011 close of the S&P 500 is 1400. That represents an increase of 10.15% between the close on June 10th and the end of the year.
- This weekend JP Morgan came out and said it expected earnings to climb an average of 10% a year through 2013.
Something has to give. Either the analysts’ forecasts are wrong and we will see a lot of downward revisions in the coming weeks, or pessimism is the emotion of the day and the market is exacerbating any negative information.
Personally I think the latter and here’s why. Below is a chart of the S&P 500 (the white line) overlaid on top of the American Associate of Individual Investors (AAII) Bullish Sentiment Survey (the orange line). As you can see from recent data, very low bullish sentiment has historically been a good time to buy.
That said, I'm not saying the analysts’ forecasts are 100% right either. They may be precise but that doesn’t mean they are always accurate. In fact, a friend of mine who is a highly respected fund manager told me he believes sell side analysts (brokerage firm analysts) tend to miss earnings by +/- 22% due to forecasting errors in their models.
Just keep in mind that since this six-week losing streak began in May the S&P 500 is down 6.8% and that big of a move over a short time frame might be enough of a discount to compensate for analysts errors.
Going Forward
With the end of the quarter a few weeks away, we are coming into “window dressing” season where managers sell their biggest losers and buy more of their high performers. With this recent dip it might provide a good opportunity for these managers to accumulate more of their favorite high-flying stocks.
Secondly, earning season is around the corner with Alcoa set to kick things off on July 11th after the close of the market. Looking at EPS forecasts for this quarter and next we are currently discounting some pretty tough comparative earnings for the S&P 500. Below is a chart showing Q2 and Q3 estimates and the forecasted YOY change.
I'm going to continue to seek good entry points that represent value over the long term regardless of the analysts’ forecasts for the next few quarters or our emotions today.
As always, we appreciate all the feedback we get. Please send your thoughts and comments to: tphillips@phillipsandco.com
Tim Phillips, CEO – Phillips & Company
Primary research done by Adam Gulledge