With S&P 500 up 37 percent in a wink, analysts turn bearish
May 11th 2009 4:00PM
Updated Dec 4th 2009 11:51AM
Are you a bull or a bear? If you're someone who values analysts' sentiment, you're probably turning bearish, or at least looking at the market with increasing skepticism.
That's because the rally that has driven the S&P 500 up 37 percent since hitting a 12-year low near 660 in March has raised analysts' concerns about the pace of the stock rebound, Bloomberg News reported Monday.
The S&P 500's biggest rally since 2002 has resulted in 34 percent of the index's companies exceeding analysts' price targets for next year, Bloomberg News reported -- historically a sign that the market may be getting a bit ahead of itself.
Did the market rise too fast?
Analysts' sentiment is one thing, but P/E valuations use profits and historical patterns as the basis for concluding whether the market is overpriced or underpriced. And by one key metric, future earnings, the S&P's current level is not unreasonable. Yale University Economics Professor Robert Shiller's 128-year data set shows an S&P 500 average of 16.3 times forecast earnings, and the S&P 500 is currently trading at about 16.25 times forecast earnings.
Technical indicators: Bullish
You've heard the sentiment and the valuation arguments. What do the technicals say? In general, the S&P 500's chart is healthy, though it still is slightly overbought, short-term. It's above the 50-day moving average, but the 200-day moving average -- the toughest average to break in trading -- remains at 952.
Market Analysis: Investors should keep in mind two other factors when assessing whether now is the time to increase or establish a position in stock-based mutual fund, sector, or company: 1) the size of the S&P 500's recent move and 2) the S&P's valuation band. The first points to a correction by the S&P of at least 10 percent and perhaps as large as 30 percent; that would take the S&P down to 821 or 639, respectively. Second, the S&P, like the Dow, frequently trades at a premium (or a discount) to the forecast P/E average, depending on economic sentiment. Currently, that sentiment sees the U.S. recession bottoming in the second half, something that tends to produce a premium. Hence, the two factors create a cross-pressure.
Bottom Line: What's the outlook for the S&P 500 then? The view from here argues that a correction of up to 10 to 15 percent is ahead, followed by a resumption of the bull market, which would make the pull-back a buying opportunity.