Shocking Disconnect Between Market & Fundamentals
Wall Street analysts expect the S&P 500 to climb more than 20 percent in the next 12 months, while many traders and technical analysts predict a 20 percent decline is ahead. The shocking 40 percentage point disconnect between the two camps either means fear is spiraling out of control on trading floors or analysts are dangerously out of touch with the realities rapidly unfolding with the global economy.
The 1358 bottoms-up S&P 500 forecast is calculated by Thomson Reuters, using the average 12-month price targets from analysts for individual companies. Meanwhile, the S&P 500 is off 10 percent and counting from its bull market high reached in April and threatening to drop even further as it continues to fall below key technical levels on the charts, traders said.
“In 12 months we’ll be down at least 20 percent from the April high,” said Bert Dohmen, author of the Wellington Letter, a technical analysis newsletter that warned clients of a coming correction the day of the S&P 500’s high on April 26th. “Analysts are going by valuations and earnings. That’s history."
Traders, as well as many fundamental investors who dabble in technical analysis, are putting aside their fundamental take because they believe that individual company research is not accounting for the uncertainty of so many macro things in this world, from the European bailout to coming Wall Street financial regulation.
Stocks plunged for a third day today on growing fears that a European bailout will either fall apart or not be enough to contain a debt contagion from spreading around the globe. It’s gotten so bad that Germany’s finance minister told the Financial Times that the markets are literally “out of control.”
In the US, financials have led the correction because of fears about exposure to bad debts in the Euro region, but some would argue their fall is even more because of concern about too restrictive financial regulation out of Washington. Uncertainty abounds with that particular piece of legislation as a procedural vote to take the bill to the floor failed once again last night.
“We’re in such a limbo that people are just afraid of losing what they have,” said Patty Edwards, founder of money management firm Storehouse Partners. “I’m in no rush to get back in because the market doesn’t care about fundamentals right now."
Edwards and other investors said there is fear out there that some troubled hedge funds will be forced to liquidate their holdings and sell those stocks indiscriminately. Technical analysis values supply and demand for securities more than the fundamental picture used by analysts and value investors because of just these kinds of occasions.
Normally, money managers like Edwards would look at a forward price-earnings ratio of 13 on the S&P 500 and feel like it is a bargain. Using the P-E calculated by Thomson Reuters produces an earnings yield of almost 8 percent for the stock market. This figure, called ‘The Fed Model’ because of its rumored use by Alan Greenspan, makes stocks look amazingly cheap when compared to a 10-year Treasury that is yielding 3.2 percent.
We “started the year at 1115.10 on the S&P 500 and here we are at 1115.05,” wrote Carter Worth, Oppenheimer’s Chief Market Technician, in a note to clients this morning. Worth, referring to yesterday’s close on the US benchmark, pointed out in his report that the S&P 500 was at 1115 in April of 1998 and three more times within in that time span.
“Some would conclude the market is cheap now or cheaper, anyway than at any time in the past 12 years,” wrote Worth. “Others would consider the takeaway to be buy and hold really is a joke.”
The confusion continues.
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