Market Insider

Tuesday Look Ahead: Europe Keeps Grip on Markets as US Stocks Start to Look Cheap

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Markets can't help but remain caught in the latest cross currents of news from Europe, but the question is whether it's going to feel like high or low tide.

Stocks got a bit of both on Monday. Initially, the market sold off sharply on a negative flood of headlines from Europe over the weekend, including that German officials were discussing the prospect of a Greek default and that Moody's could downgrade French banks. But by late in the session, stocks rallied back to finish higher after a Financial Times story said Italian officials were talking to China Investment Corp about "significant" purchases of Italian bonds and strategic investments in Italian companies.

Tuesday's focus will be on a 7 billion euro Italian bond auction early in the day, and then shift to U.S. markets, where the U.S. Treasury is auctioning $21 billion in 10-year notes at 1 p.m. Data includes the 8:30 a.m. ET release of import prices and the 2 p.m. release on August's federal budget. The NFIB small business survey is released at 7:30 a.m. ET. Best Buy reports earnings ahead of the open.

Buying Opportunity?

Stock market sentiment has grown particularly gloomy, which some strategists see as a positive. As the negative news kicks up from Europe, traders have been watching technical levels to see whether stocks will retest August lows. The S&P 500 dipped below the key 1140 support level briefly Monday, but then rebounded to close 8 points higher at 1162. The Dow was up 68 at 11,061.

Jeff Kleintop, LPL Financial's chief market strategist, said this may be a great opportunity for long-term investors who can look beyond the current volatility. "It's been 20 years since trailing P/E levels have been this low...It's really the best time in 20 years for longer term investors to buy stocks," he said.

Kleintop said even though P/E is one of the best predictors for the performance of stocks in the next 10 years, many investors are ignoring it. "So many investors left to their own devices would be selling in droves," he said.

The trailing P/E (price-to-earnings ratio) is about 12 times on earnings for the S&P 500 companies earned over the past 12 months, according to Kleintop. In a note, he wrote that the annualized loss for stock market investors during the decade of the 2000s was the result of record high 30 P/E,  in early 2000.

"The current P/E of about 12 forecasts a better decade of performance ahead. The current P/E of around 12 suggests a 7-8 percent price return for the S&PP 500. The addition of a 2 percent dividend yield may result in a total return of 9-10 percent," he wrote in a note. Kleintop said he used trailing instead of forward P/Es because investors are wary that earnings estimates are too high.

Kleintop still expects the S&P to return to 1,350 by year end. "We're in a bottoming process I think," he said. He said he's been buying consumer discretionary and industrial sector ETFs, as well as tech through the QQQs, which represent Nasdaq.

He said the market could continue to be volatile and his worst case scenario has the S&P reaching 1,000.

"We've been in this range for a while now. It's not new news we're getting. It's just fretting over the same old thing. I think the market is building a base here," said Kleintop.

"It's a lot of emotion whenever you get these big gaps and big swings in the market. I don't think it tells you anything about whether the issues are going to get resolved in the near term or fester...It just tells you everyone is very focused on it," he said. "...It tells you there's a lot of emotion in the market and that usually marks bottoms rather than tops."

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