After 17-Session, 14% Jump, S&P 500 Frothy

Bulls are snorting – again. From the Boxing day bottom, the S&P 500 is up 14 percent. Last week, it recaptured 2630 as well as the 50-day. While healthy, the rally has come too far, too fast.

Equity bulls deserve kudos. They suffered quite a rout in October-December but have put up a healthy countertrend rally in the past four weeks. Since bottoming intraday at 2346.58 on December 26, the S&P 500 large cap index (2670.71) rallied 14 percent.

In so doing, the index has reentered the rectangle it was in for most of last year. Since late January last year, the S&P 500 played ping pong between 2800 and 2600. The latter was lost mid-December, followed by acceleration in selling (Chart 1). During the October-December selloff, both the 50- and 200-day moving averages, in addition to tons of other support, were lost.

Last week, the index retook the 50-day (2625.45), as well as support-turned-resistance at 2600-2630. It is possible stops got taken out; the index jumped 2.9 percent last week – fourth straight weekly increase. The S&P 500 now finds itself right at a declining trend line from early October, when it started to unravel.

From early October through late December, the S&P 500 fell just north of 20 percent. Since that low, it has recouped half of that loss.  Low earnings bar helped.

Post-tax cuts of December 2017, EPS estimates jumped. On December 21 that year, 4Q18 operating earnings estimates for S&P 500 companies were $38.41. By mid-August last year, they rose to $42.40.  Then the sell-side took out its scissors. When 4Q ended, they had lowered them to $40.42 – just in time for companies to meet/beat. With 13.4 percent of the reports in, these companies have earned $40.32.

More importantly, perhaps, the downward revision trend in 2019 estimates continues. Early August last year, the sell-side expected as much as $177.13 this year. At the time, they expected 2019 earnings to grow 12.2 percent. As of last Thursday, these companies are now forecast to earn $169.61 this year. This still represents 8.1-percent growth. This follows a 26-percent surge in 2018, which benefited from the afore-mentioned tax cuts.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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