Market Earnings Valuation Looks Reasonable

Last week was a trying time for the market, with a massive pullback on Fed news and the ending of earnings season. We'll sort it all out below, and make a roadmap for the current week.

Economic Calendar

It was not only a moderate week last week in term of economic data, what little data there was could largely be interested in multiple ways. Let's just dig in from the beginning with Tuesday's productivity. The 0.9% dip in productivity on the surface would indicate wasted man-hours (which it does). There were some spins on the data, however, suggesting that the decline in productivity was an indication that employers actually needed to hire more workers to meet needs... a counter-intuitive idea initially, but one that's not entirely without merit, as labor costs barely budged (+0.2%).

Wholesale as well as business inventories both crept upward, the former by 0.1% (versus expectations of 0.4%), and the latter by 0.3% (versus expectations of 0.2%).

Initial claims were even higher than the prior week's multi-month high of 482K, coming in at 454K this time around. Continuing claims actually sank though, to 4452K.

Retail sales were up, with or without autos (+0.4% with, and +0.2% without). And, both were basically in line with forecasts.

The big story from last week, however, had to be the inflation figure...a bitter irony to Tuesday's Fed announcement and the aftermath of it.

After three months of declining inflation figures, the possibility of deflation was being posed more and more in a non-hypothetical sense. Bernanke & Co. hammered that nail in the coffin when announcing quantitative easing (even if a diet version of it) on Tuesday... a surefire sign that deflation was inevitable, right?

Sure enough, the inflation rate not only didn't sink into negative territory last month, it actually pushed upward, to 1.24%. Not that one month makes or breaks a trend, but thus far, the deflation chatter remains more fear-mongering than a qualified assumption.

Economic Calendar


As for the coming week, it should prove less eventful.

Housing starts and building permits on Tuesday are expected to both be roughly in line with last month's numbers. We'll hear about producer (manufacturer) input inflation on Tuesday as well; look for tempered figures there too.

The biggies for July, however, are going to be industrial production and capacity utilization...two 'summation' figures that put a bottom line on most of the other data being batted around. If you're looking for a bigger-picture clue, that'll be it. The experts are looking for a 0.6% increase, and 74.5%, respectively. These two data sets have been quite accurate and helpful in terms of making long-term investment decisions based on economic data.

Dow Jones Industrial Average

Just to keep things fresh, this week we're going to dissect a chart of the Dow Jones Industrial Average - even if the message is essentially the same as it would have been for the S&P 500. And for this week, that message is...

It sure doesn't take long to give it up, does it?

With Wednesday's tumble from 10,644 to 10,378, the Dow was back at levels not seen since July 23rd... the mid-point of the rally up until that point. Since then, it's dwindled even further, and is back under all its key moving averages. Yikes.

On the flipside though, the bullish damage may have already been done, and the bearish damage may not be as great as first assumed.

Despite the big dip, the Dow has already made a higher high, and has actually yet to make a lower low. Yes, it may go on to do so, but this may only be the expected volatility one would anticipate seeing with such a big reversal.

As for the bearish damage not being all that great, take a look at the volume bars. It was certainly a little higher on Wednesday, but nowhere near the level one would expect with a 2.5% plunge. If you want to see an example of problematic selling volume look back to May.

Bottom line? Let's see how the market responds this week before jumping the gun.

DJIA Chart


NASDAQ Composite

While we can make the same low-volume-selloff argument for the NASDAQ that we did with the Dow, that's about the only positive thing we can say about it.

In simplest terms, the combination of all that resistance around the 2318 area (horizontal ceiling, 100-day moving average line) just proved to be too much. The composite brushed it briefly on Monday, before it all came crashing down. And just for the record, yes, it all started to unravel before Tuesday's Fed announcement; the news was just the accelerator.

The good news is, there's a floor straight ahead if the bears remain in control. It's the lower Bollinger band, at 2111. As was the case with the Dow though, we don't even want to blindly make that assumption. Last week was an emotion-driven week, and doesn't necessarily reflect the market's true value, or even investors' true perception of its value.

The fact is, there's nothing concrete enough about this chart to trade off of. Let's let a floor or ceiling step up to the plate first before we make any major decisions.

COMP Chart



Earnings Reality

Technically speaking, earnings season isn't over yet. With well over 90% of companies having reported though, where we are on the Q2 income front is pretty much where we're going to be. And for the S&P 500 anyway, where we are isn't half bad...despite what the last week would have you believe.

No, it's not part of our usual technically-oriented fare, but we though you might enjoy a look at the S&P 500's trailing earnings in comparison to forecasted earnings, and P/E ratios based on the same figures.

As of Q2 so far, the S&P 500 is on pace to 'earn' $20.95 for share.... a number that's expected to keep rising over the next two years. Based on earnings over the last twelve months, the current TTM P/E is a mere 12.8... a figure that will continue to get small over the next two years if the price doesn't change (though it obviously will).

The question here isn't one of valuation - the market's as 'cheap' as it's been in many years. The only debate you need to be having with yourself or with others is whether or not those future earnings projections are achievable.

S&P 500 Earnings



Disclosure: No positions.