by Raymond Chan

Technically speaking – yes. Let’s look at the technical chart on the S&P 500

Chart 1: S&P500 1 year chart



Source: IRESS

The rally in the S&P 500 has lost momentum over the past few weeks and on Saturday 1 February the price fell below the support of 1,815 points (and closed at 1,790 points). A bearish divergence between the price and the RSI indicator has formed, suggesting a further breather is possible.

The US stock market was sold down not because of China PMI, Argentina Peso, Turkey Lira etc but a typical “Bull Market Correction”. Back in December, the US was at a moderately expensive territory which became more overbought after the Christmas Rally. What we are seeing now is a breather that has taken us back to a more reasonable level.

Further, our strategist Michael Knox feels that there is nothing wrong with this US earnings season. With over 30% of firms in the S&P500 having reported, the estimate for operating earnings per share (EPS) for the December quarter of 2013 is $US28.77. This is up by $US5.62 from the same quarter a year before. More importantly this estimate is higher than the expectation of $US28.14 going into this reporting season.

We expect the US earnings to continue to rise and by the end of 2014, the operating EPS could reach US$32 (or 1848 S&P 500 points based on our bond yield assumption) so there is plenty of upside according to US fundamentals.

Since the beginning of 2014, the Dow Jones and the S&P 500 were down -5.2% and -3.2% respectively. The S&P 500 is still a touch overvalued according to our model and over the next 2 weeks we will have US Congress arguing over the US debt limit. Should this occur and the market continues to fall, we will be set up for an excellent rally in the next seasonally strong month of April.

How about the ASX 200?

It’s very similar to the US market. Our stock market was overbought in early January and exceeded the fair value of 5,200 points (based on reported earnings in Octobers’ reporting seasons). The current breather took us back to around this level. The verdict will be out over next few weeks if we could see some genuine growth in FY13/14 (after two years of downgrades).  If we see higher earnings as suggested, then ASX 200 model valuation will go up and so does the physical ASX 200 index.

It’s interesting to note that the Core Portfolio usually gains outperformance during market downturn given (1) our concentrated approach (investing only up to 20 stocks, rather than top 300 stocks in a basket) and (2) our defensive weighting (in Cash and Fixed Interest). As such, we should only sell down individual stocks on their own merits (such as deteriorating technical trends, earning downgrades etc.)

For now, correction creates opportunities. We closely monitor individual stock momentums for any potential addition into our portfolio.


Disclaimer – Morgans Financial Limited (Morgans)

This report is provided for general information purposes only and is not intended as an offer to enter into any transaction.  This information contained in it is not necessarily complete and its accuracy cannot be guaranteed.  We have prepared this presentation without consideration of the investment objectives, financial situation or particular needs of any individual investor.

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Raymond Chan is the Managing Partner and Authorised Representative of Morgans - 259387
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