On Monday, both COMPQ and RUT made new closing highs. The Euro 350 also made new highs this week (chart). A majority of sectors are near their highs and key moving averages are rising (chart). It's difficult to be bearish when the trend is this strong and, seemingly, expanding outside the US.
Macro expectations are also rising. US macro is now exceeding expectations by the most in 2013; G10, by the most in nearly two years (chart). This matters, since these rising measures correlate with better EPS growth and higher PE multiples.
The rub is that the V-bounce pattern in SPX from the June low has failed every time in the past 20+ years (read today's post here). In each case, a retest of the recent low (8% lower from here) has ensued. So, while returns for 2H 2013 have a 80% probability of being net positive, the near term risk is equal or probably greater than forward returns.
These downside risks are enhanced by very bullish investor sentiment (read today's post here). Schaeffer's remind us that the last time Investors Intelligence bears were this low, SPX dropped 20% in the ensuing months. Likewise with the equity-only put-call ratio (chart).
The 2Q13 reporting season is almost over. 90% of companies have already reported and the results are mediocre. 2Q EPS growth is tracking just 2.1%, the third lowest growth rate in 4 years. Excluding banks, EPS growth is actually negative 3.1%. Revenues are tracking 1.8% growth, which is in-line with GDP and EPS (i.e., margins are flat). This is concerning, as consensus EPS growth is 7% and 11% in FY13 and F14, respectively. The market is at risk of revaluing lower when consensus shifts to meet reality. Already, 68 of 85 SPX companies (80%) have issued negative 3Q EPS guidance.
The technology sector, which has been leading the market, has had some of the worst earnings figures. 2Q EPS growth is tracking negative 8.2% and expected 3Q earnings growth has fallen to 1.6% from 5.5% on June 30. Read more here.
In the short term, the SPX pattern we have been tracking on twitter is shown here. It triggers with a move below 168 and becomes invalid with a sustained move over 170.
