Thursday, April 21, 2011

Stocks Ignore S&P, Roar Ahead

After a rocky start to the week, the stock market roared ahead yesterday.

S&P warnings about the future credit ratings of trillions of dollars of US debt may prove prescient in the future, but for now the market wants to move higher.

The Financial Times this morning had an article titled "Investors Seek Clues in a Cloudy Earnings Picture". Written by Michael Mackenzie and Michael Stothard, the piece had a number of interesting statistics on the market.

Company earnings reports have been reasonably good for the first quarter of 2011. While we are still early in earning season, of the 60 companies in the S&P 500 that have reported 78% have beaten expectations.

The blended earnings growth for the S&P 500 in the first quarter is running at +12%, roughly equal to expectations at the beginning of the year.

Not surprisingly, the sectors with the highest earnings growth rates include materials (+39%); energy (+31%); and industrials (+23%). Not coincidentally, these three sectors have been the best performers in the S&P year-to-date.

And, according to the Financial Times, the forward 12-month P/E ratio for the S&P is 13x, which is below the average of the last 10 years.

Interesting, Merrill Lynch research indicates that their retail investor is selling, not buying this market. Here's an excerpt from Merrill's David Bianco earlier this week:

Overall flows: Largest net sales since May 2010
The first week of reporting season was met with widespread selling of US stocks by BofAML clients. Net sales of $1.6bn last week (4/11-4/15) were the largest level of net sales since May 2010. This compares to net buys of $0.28bn the prior week. All three client types (hedge funds, institutional clients, and private clients) were net sellers last week. Hedge funds returned to net selling of US stocks last week after net buying for the prior three weeks. Over the past year, hedge funds have not been net buyers for more than three consecutive weeks. All three size segments (small, mid and large) also saw net sales last week.

In my opinion, in addition to reasonably good fundamentals, the huge reservoir of liquidity that the Fed and Bank of Japan are providing the markets are also aiding the stock market.

There will be a time to sell stocks, but I don't think we're there yet. I think the party ends when the Fed starts raising interest rates, but this doesn't seem to be in the cards for a few months at least.