S&P seen failing in reach for year-old record

As the anniversary of the S&P 500’s high mark approaches, the benchmark U.S. stock index’s latest rally has stalled and failed to breach a key level, prompting some calls for sell-offs, at least in the short term.

The rally, which started in mid-February and fizzled in late April, took the S&P 500 just shy of its record close set May 21, 2015. The index trades at nearly 17 times the estimated earnings of its components over the next year – still as expensive as at its peak and in the two attempts since to breach it.

The latest rally was driven by more companies than a year ago, something viewed as a positive by both market technicians and those who deal with fundamentals. It was not, however, enough to catapult the S&P to new highs.

The S&P rose almost 17 percent from its two-year low hit in mid-February to this year’s high mark of 2,111 in April.

“Seems every time we get up here the market runs out of steam, investors start to worry about valuation,” said Paul Hickey, co-founder of research firm Bespoke Investment Group in Harrison, New York.

Valuation is not the only reason to sell but it is “hard to justify adding new money,” he added.

Hickey said earnings need to catch up to valuations, something that most analysts expect to happen in the second half of the year according to the latest estimates compiled by Thomson Reuters I/B/E/S.

The first-quarter earnings growth estimate stood at negative 5.4 percent on Friday with 90 percent of S&P 500 companies having reported. Revenues are expected to have fallen 1.9 percent from the first quarter of 2015. The second quarter reporting season begins in July.

LINE IN THE SAND

Technical analysts see strong resistance, or significant selling pressure, at 2,100 on the S&P. Both in August and December the index hovered near that level before double-digit percentage declines. Three weeks ago it again failed to get over the hurdle, triggering calls for another sharp sell-off.

“For a breakout we need consecutive weekly closes above 2,100,” said Katie Stockton, chief technical strategist at BTIG in New York. “Momentum is not there yet, so I’m watching for the downside.”

Her technical analysis showed buyers would initially get into the S&P when the index nears 2,000, and draw even more support in the area between 1,925 and 1,950, she said.

“That’s where I think the correction takes us. We need to set higher lows compared to February; that would be the first step toward a real recovery.”

Another pillar for that recovery may already be in place, in the form of broader market breadth. In the week the S&P set its record last May, nearly 550 stocks on the New York Stock Exchange hit a 12-month high. In six of the last seven weeks, even more stocks have hit new highs despite a drop of over 1 percent in the S&P 500.

“We’ve had a consolidation of the move up, the market is catching up to itself,” said Bruce Zaro, chief technical strategist at Bolton Global Asset Management in Boston.

Zaro said even though he saw “a potential for the (S&P 500) to make fleeting nominal new highs,” the market would eventually break down due to the uncertainty ahead of the U.S. presidential election on Nov. 8.

“We’ll be in much firmer footing after the election.”

Source: Reuters

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