Sunday, January 30, 2011

Egypt, Investor Sentiment And The Market

The events in Egypt over the last week are now dominating headlines and impacting recent market actions. Many are commenting about the events in Egypt so I will not restate what is occurring in that part of the world. Readers can follow the news on Reuters live coverage link.

The events in that country have provided investors with a reason to take profits though. Often times market pullbacks or corrections occur as the result of unpredictable events. Given the strength of the market's advance since the lows in July last year, this pullback is not surprising.

From The Blog of HORAN Capital Advisors

As I noted in a post in mid December regarding the cup and handle formation of the S&P 500 Index, a breakout occurred around the 1,225 level. A retest of this level would not be surprising if the market falls through the 50-day moving average support. A retest of this cup and handle support would equate to a 4% decline in the market from Friday's close.

For investors then, they should maintain a focus on company fundamentals. With just over 40% of S&P 500 companies reporting earnings, Thomson Reuters notes 71% of those firms have reported earnings that exceeded analyst expectations. Additionally, the estimated earnings growth rate in Q4 is 36% and the forward four quarter (Q4 2010 – Q3 2011) P/E ratio for the S&P 500 is 13.3.

From The Blog of HORAN Capital Advisors

Investor sentiment figures reported by the American Association of Individual Investors is not overly bullish either. Last week's AAII sentiment survey reported that bullish investor sentiment declined nearly 9 percentage points to 42%. This compares to the long term average of 39%. Last week's bullish sentiment reading is down from the 63% reported in late December.

From The Blog of HORAN Capital Advisors

At HORAN Capital Advisors, we continue to be constructive on the longer term fundamentals for equities, especially compared to bonds. To us large multinational U.S. firms appear to be trading at more reasonable valuations vis-à-vis midcap and small cap equities. One factor we are focusing on is the ability of firms to generate top line revenue growth, and not at the expense of margins. The potential pullback the market may experience near term will likely give investors an opportunity to build or add to equity holdings.

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