06 September 2010 at 7:57 GMT
The current market is clearly in bullish mode driven by strong, but the macro releases last week were not great macro – especially the US ISM and the labor market reports. This week there are few economic releases that can stir this picture and this is the main reason for us to expect equities to surge higher. We do not, however, expect this to happen in a straight line given that there are both technical and valuation thresholds.
The S&P 200-day moving average (DMA) is currently at 1116 and we are going to see some resistance here before moving above this line. However, a strong move above the 200 DMA will indicate further bullish strength and this could take us further than 1130. Furthermore, our fair value perspective on S&P500 is around the 1120-level given an earnings expectation 80 USD/share for 2010 implying a 14x PE multiple and this is pretty much in line with consensus. So, a lot of portfolio managers looking at these numbers will not support the market short-term much above these levels entering in long positions – rather they will start to short cover at these levels.
Another longer-term these worth noticing in equity markets is there is virtually no premium on growth stocks vs. value stocks. Usually there is a premium given that the growth stocks are expected to outperform (at least in the long run). This premium is currently at record lows indicating the market is heavily positioned within value stocks (especially consumer staple companies with strong dividend payouts). This equilibrium is not likely a stable long term one and we expect a move towards growth stocks and the current optimism in markets could be the trigger.
Read the Morning Kickoff.
Look at the Charts of the Day.