S&P 500 Remains Overbought

It is Memorial Day weekend. Be sure and thank a veteran (particularly the Korean War and Vietnam vets, who didn't get anything near the public appreciation that WW II and today’s vets get), and remember Drexel Hamilton’s mission of providing a career outlet for those interested in the markets and Wall Street for both able-bodied and wounded veterans of the US Armed Services. It is great that Drexel Hamilton provides gainful employment opportunities for those who have served, and those who were injured.

With Wal-Mart’s (WMT) earnings report thought to officially conclude Q1 ’13 earnings season, and with 486 of the 500 companies reporting, Q1 ’13 earnings growth was 5% (exactly where we thought it would be in March and early April) while revenue growth was flat at 0%.

Probably more interesting, with Q1 ’13 earnings growth at 5%, and the “forward 4-quarter” estimate now growing at 4% year-over-year, we should probably expect 4% – 5% earnings growth for Q2 ’13, when the reporting fun starts in July. The current S&P 500 earnings growth estimate for Q2 ’13 is +3%, which will likely get whittled down to 0% – 1%, by July 1, and then we’ll work higher from there.

That is the pattern since the summer of 2012. We seem to have settled into this mid-single-digit earnings growth range, with low-single-digit to flat revenue growth.

Per ThomsonReuters, the “forward 4-quarter” estimate is now $113.43, down from last week’s $113.56.

The P.E ratio on the forward estimate given Friday’s close is 14.5(x).

The “earnings yield” is 6.88%.

The year-over-year growth in the forward estimate rose to 4.13%. We need to see the growth estimate rise over 6.24% or the late January ’13 high to help the market. When there is steadily increasing growth in the forward estimate, it is easier for the P.E on the S&P 500 to expand.

Not much to add on the earnings front. We’ll save some stats for next week.

More retailers report this week, with Tiffany (TIF) on Tuesday morning, May 28, and Costco (COST) on Thursday May 30th, both before the bell. Like most of retail, the group is at the higher end of its valuation range. Don’t own Tiffany, but I do have a small position in Costco, which is the gift that keeps on giving. TIF seems way overvalued to me, but Japan is between 15% – 20% of total TIF revenues and between 22% – 30% of operating income. I’ve been waiting for TIF to re-test the $50 – $55 area, with no luck.

In general, I think broadline retail and most parts of retail are fairly valued today. Tough to buy retail stocks here given the P/Es and cash-flow valuations. Bespoke noted at the end of April that those S&P 500 companies with primarily US revenues (Domestics) were outperforming S&P 500 companies with 50% of their revenues from abroad, by 1300 bps or 13%. Retail is predominantly US-revenue centric.

The so-called “bond proxies” sectors of the S&P 500 got hammered this past week. Utilities are starting to get oversold, while Telecom and Consumer Staples also took a beating this past week. The three things these sectors have in common are 1.) steady, consistent earnings growth, 2.) some revenue growth, and 3.) those seeking dividend or decent dividend yields tend to be attracted to these sectors.

Per a graphic on CNBC, this was the worst week of 2013 for Consumer Staples, however the SPDR Consumer Staples ETF (XLP) was down just 57 bps on the week, or -0.57%.

Treasuries are the last asset class to fall, from the March, 2000 through October, 2011, “risk-off” trade. Fed Chair Bernanke’s testimony this week could be the batter stepping into the batter’s box for the first pitch of the 9-inning ballgame, that ends the 30-year bull market in Treasuries. (Too much hyperbole ?)

We sold about half of our Merck (MRK) position this week. The stock is getting fully valued, but we’ll keep the rest for now. The large-cap pharma group continues to act well.

We added to the inverse Treasury ETF (TBF) this week. Key technical levels are 2.09%, 2.39% – 2.40%, and then 2.50%. We are keeping our high yield exposure and are selling our high-grade and intermediate bond exposure.

We tend to make changes in our portfolio slowly, over a reasonable time frame, rather than big shifts in weightings or strategy. No sense in scaring clients any more than they already are…

We still like Facebook (FB) and added a little to our long position on Friday. We’ll have a graph up this week or later in the weekend.