When it Rains, it Pours (In a good way)

September 3, 2014 4:45 PM

Today we received more indications that both from a technical and fundamental perspective, analysts are coalescing around a common theme. In short, markets are moving higher.  Substantially higher over the next 12 months.  S&P Capital IQ’s Investment Policy Committee raised its target for the next 12 months from 2100 to 2200. In other words from an expected 5% increase over the next 12-months to a 10% increase for the widely followed index. Based on our last close of 2003.53, that represents roughly a 10% premium.

This might be considered by some to be a bold call heading into the last month of Q3 and with Q4 in front of us - particularly with all the uncertainty that still resonates around the globe and with some pockets of our economy moving very slowly towards robust velocity. Some might also suggest that with the gains the equity markets have registered over the past several years that it would be perfectly normal for markets to pull back or stagnate over this period. But not from where I sit (and have been sitting for some time).

S&P Capital IQ consensus expectations call for EPS to rise by 11% over the next 12 months. CPI is expected to remain largely unchanged at roughly 2%. S&P Capital IQ continues to state that even if there is P/E contraction to sub 17 on the S&P 500  that strong fundamental forces within the economy will act to support pricing. I have held this position since the beginning of the year despite and through the Q1 contraction though my targets have been more modest to the upside thus far.

As I mentioned earlier in the week with Matt Egan of CNN Money, even those bears calling for a pullback are only doing that within the context of a secular bull market. Effectively balancing the need to be pragmatic with the need to separate from the pack.

Interestingly, markets have gone into a stealth pause over the past several weeks with averages barely moving – effectively leveling off at historic highs. Today the NASDAQ suffered its first distribution day in close to a month giving back 25.43 points or 0.55%. Volume expanded by 2.24%. The Russell 2000 also gave some ground shedding 0.6% on the day. Given the inflated P/E’s of these indices they are first in the line of fire if there is any disturbance in the force.

This does seem to portend a pullback may be in the works but if it does materialize, it will be short lived and shallow. Too short lived and shallow for most investors to capitalize on it in a meaningful way.

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