Ox, As you point out, the next year earnings estimate for the SOX has been trending up nicely for the last several months. IMO that will continue over the next several months as well.
Whether those upward earnings will drive the stock prices up at the same rate is hard to tell. In general, the market likes to think that better times are ahead and the economy will recover nicely over the next year or two. It remains to be seen if that will actually occur.
Here is an excerpt from the Briefing.com "Page One" report this morning that points out a few of the positive and negatives the market is looking at right now.
<<With respect to our overall market view, it has not changed. Our belief is that the S&P will stay locked in a trading range between 825-1000.
We continue to think it is prudent for investors to take some profits from positions that have enjoyed outsized moves or, at least, to take steps to insure those profits by tightening stop orders, buying puts, and/or rotating into some of the defensive-oriented groups that have trailed the world-is-not-ending rally.
Our inclination to favor some defensive positioning shouldn't be read as a message to sell everything and go short. Rather, it is predicated on the belief that the easy money has been made in the rally off the March lows and that, with expectations for recovery having risen considerably, the risk of disappointment and a second-guessing sell-off have too.
It's not as if there aren't any potential spoilers lurking for the stock market rally either. Oil prices are rising at an alarming pace; Treasury yields have risen and have slowed the refi boom; and the labor market remains extremely weak, which will curtail consumption and the housing recovery.
This is a market, though, where one needs to be hedged.
With $3.75 trillion still sitting in money market funds, or roughly $1.25 trillion more than at this time in 2007, there is an arsenal of cash that is locked, loaded, and waiting to be fired. Moreover, Credit Suisse points out that short interest at the NYSE as of May 30 (4% of shares outstanding) was nearly as high as it was in mid-March (4.23%).
There are plenty of doubters of this rally, which can be thought of as a contrarian factor that isn't inconsequential. So, while the market seems ripe for consolidation, one can't disregard the potential for a squeeze to new highs in this leg of things that gets exacerbated by some chasing action.
Nonetheless, we find ourselves climbing our own wall of worry when trying to reconcile our economic view with the stock market's behavior. We don't share the same rosy disposition beyond the near-term here, so we would be selling into the strength of a move to the high end of our target for the S&P.>>
Don |
