After 9 Weeks Of Rally, Signs Of Fatigue Last Week On Russell 2000/IWM

US stocks are on fire. The Russell 2000/IWM was essentially unchanged last week, with the index down 0.03 percent and the ETF up 0.06 percent. This followed nine weeks of persistent rally, during which they jumped 34 percent. Conditions are extremely overbought. Amidst this, the Russell 2000 last week flashed a spinning top candle near crucial resistance. Small-cap bulls still have the momentum ball but run a risk of losing the grip.

These are interesting times.

In the past five months, US stocks seesawed. The October-December decline was scary. Bears put up quite a show. The rally since the late-December low has been no less impressive. Bulls have wrested control of the momentum ball. During all this, earnings estimates just kept going lower. In fact, estimates peaked much earlier.

Operating earnings estimates for this year for S&P 500 companies (large-caps) peaked at $177.13 early August last year; at the end of February, they were $166.06. For S&P 400 companies (mid-caps), 2019 estimates peaked mid-October last year at $124.32 and for S&P 600 companies (small-caps) at $61.63 late June last year; they are now $113.82 and $53.71, in that order.

As a result, forward multiples, which began to look reasonable toward the end of December, are once again elevated. On 2019 earnings, the operating P/E for both S&P 500 and 400 companies are 16.9x, and 18.2x for the S&P 600 (Chart 1).

The spike in 2018 earnings was primarily due to the tax cuts of December 2017. With 96 percent of S&P 500 companies having reported their 4Q, 2018 estimates at the end of February were $151.06, versus $124.52 in 2017. For the S&P 400, 2018 was at $98.59 and 2017 at $78.12, and for the S&P 600, they were respectively $39.73 and $31.19.

At the beginning, the sell-side was very enthusiastic about 2019 prospects, but with no visible tailwind, reality began to sink in. In all probability, the prevailing downward revision continues in the months/quarters ahead.

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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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