If operating earnings for 2010 and 2011 come in as anticipated, the market is certainly likely to end the year at a level that is higher than where the S&P 500 Index closed today, 1,030. As the below chart notes, the market does track reported operating earnings.
After what has turned out to be a dismal second quarter for the market, many of the stocks in the S&P 500 Index are trading below their 50 day moving average. In fact, only 5% of the stocks are trading above their 50 day averages. This is a level that was last reached in mid May of this year and March of 2009. So on a short term basis the market certainly qualifies as being short term oversold.
The percentage of stocks trading above their 150 day moving average at the end of June (20%), is lower than the May 2010 level of 26%. This moving average declined to only 2% as of early March 2009. This could be one of those examples where the market can stay irrational longer than an investor can remain solvent.
For investors, company earnings reports for the second quarter, and more importantly, forward earnings guidance, will be critical in determining the direction of the market for the second half of the year. At this point in time at HORAN Capital Advisors, we are finding value in higher quality companies that are generating decent earnings and cash flow growth as well as trading at attractive valuations.
Economically, there are a number of positives that we will touch on in our second quarter newsletter. The two biggest negatives though are housing and employment.
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