S&P 500 and Dow Jones Industrial Average: Why Markets Could Surge 60 …

Tyler Laundon: Despite the fact that the broad market is in record high territory, there is ample evidence suggesting the good times are not over.

The fact is that while stocks have been rising, so have earnings. And that means that on a valuation basis many stocks still trade in an attractive range.

When the market closed recently the SP 500 (INDEXSP:.INX) was trading at 18.6-times trailing earnings. That’s a little above the index’s long-term average PE of 15.5, but still well below bull-market highs that were reached in 2000 when the index’s PE topped 30, and in 2007 when it hit 22.

Take a look at the following chart, which plots the SP 500’s earnings since the late 1800s. You can see that earnings have recovered to reach almost $88.00, just a few bucks away from the all-time high of $94.77 set in June 2007.

It’s now clear that we’re enjoying another bull market in stocks, aided in part by historically low interest rates, an improving U.S. economy and – to be frank – unattractive alternatives to stocks.

Underpinning all of this is the fact that companies are doing well where it matters most, on the bottom line. And as I stated earlier, many stocks are still attractively priced based on historical valuations.

Yesterday the SP 500 index closed at 1,609. Let’s hypothetically say it trades up to a PE of 30 like it did in 2000. That would mean the index could reach 2,630, if earnings stayed exactly where they are. That’s more than 60% above yesterday’s close.

Alternatively, say the index were to trade up to a PE of 22, like it did in 2007. That valuation target implies 20% upside.

Of course if earnings and valuations both rise, the index could move beyond 20% to 60% higher. But let’s not get ahead of ourselves here.

The chart below plots the SP 500’s historical PE and helps to put this discussion into context. Note that the extreme swings are the result of stock market crashes, which throws off the price-to-earnings ratio. This is why I’ve quoted bull-market PEs above, rather than historical highs.

My point here isn’t to convince you that we’ll see the SP surpass 2,600 in the near future. But it is possible that the index will continue to rally toward this threshold if earnings continue to rise.

So while major U.S. stock indices – like the SP 500 – are enjoying a steady rally, there are still extremely attractive stocks out there. Long-term investors should stay the course and continue to look for the types of stocks that can return outsized gains and lead to true wealth.

In fact, over the past number of years I’ve found that there is one common thread among almost all of these best-performing stocks.

This “common thread” isn’t a reasonable PE ratio for the SP 500 Index, but something that is far less evident to everyday investors. And it can help you find the market’s best performing stocks, especially during a bull market.

This article is brought to you courtesy of Tyler Laundon from Wyatt Investment Research.

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S&P 500 Index: Navigating A Fed-Dependent Market

Chris Ciovacco: Experienced traders and investors respect and understand the concept of “Don’t fight the Fed”. The basic rationale behind the expression is that when the Fed is printing money, the odds are tilted in the bulls’ favor. Conversely, when the Fed is tightening policy, bearish odds begin to pick up.

What Fight Are We Trying To Avoid?

One of the most frustrating aspects of investing during Ben Bernanke’s watch is the constant stream of conflicting messages being delivered by members of the Federal Reserve. One day the market may hear from a pro money printing Fed governor. The next day investors may hear talk of the need to “taper” the pace of the Fed’s bond buying program. The confusion in markets was evident on May 22 when the SP 500 (INDEXSP:.INX) spiked higher early in the session as Ben Bernanke’s remarks hinted at a steady stream of money printing. Later in the session after the Fed minutes were released, the rush to buy was replaced with a rush to sell as traders began to believe Fed tapering was coming sooner rather than later.

A Prudent Fed Strategy

With the Fed due to deliver a formal policy statement this Wednesday, it makes sense to identify a line in the sand to discern between “leave my investments alone” and “I need to play some defense”. As outlined at the 2:21 mark of the video below, we believe the line in the investor’s sand can be drawn at 1593 on the SP 500.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode. 

The Trend Is Your Friend

One of the reasons for exercising some patience above 1593 on the SP 500 is based on the market’s current bullish trend. Traders use the slope of the 50-day moving average to monitor the market’s intermediate-term trend. As shown below, not too many bad things happen as long as the slope of the 50-day is positive or flat. The 50-day is shown in blue. As of noon Monday, the slope of the 50-day was still positive, which is indicative of a bullish trend.

Fed Is Fuzzy – Chart Is Clear

It is unlikely this week’s Fed statement completely removes the market’s confusion regarding the future pace of printing press utilization. From Bloomberg:

What central banks may have the world over is a failure to communicate. Officials are struggling to spell out their visions for monetary policy, often amid a chorus of competing views. Chairman Ben S. Bernanke is trying to manage expectations about when the Federal Reserve will slow asset purchases and raise interest rates. Bank of Japan Governor Haruhiko Kuroda’s reflation-push is backfiring by driving up bond yields. European Central Bank President Mario Draghi is dashing investors’ hopes he once kindled for extra stimulus. The muddied messaging already is roiling financial markets, threatening to undermine the confidence of investors, households and consumers and so undoing efforts by central banks to strengthen their economies.

Even if we had an advance copy of this week’s Fed statement, it would be difficult to anticipate the market’s reaction to it. The reaction may be one of fits and starts. The charts provide us with clear and unambiguous feedback, which is in stark contrast to trying to interpret a Fed policy statement.

Investment Implications

The number of inputs when making investment decisions are nearly limitless. Our strategy this week will be to err on the side of holding our long positions in stocks as long as (a) the slope of the SP 500’s 50-day remains positive, and (b) the SP 500 remains above 1593 on a closing basis. Until some conviction returns from buyers, we prefer diversified stock plays, such as the SP 500 ETF (NYSEARCA:SPY) and technology (NASDAQ:QQQ). If (a) and (b) above are no longer in place, we will consider more defensive positions, such as consumer staples (NYSEARCA:XLP) and bonds (NYSEARCA:AGG).

This article is brought to you courtesy of Chris Ciovacco from Ciovacco Capital.

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Article Source: http://etfdailynews.com/2013/06/17/sp-500-index-navigating-a-fed-dependent-market/

Zoetis to Join S&P 500; First Horizon National, QLogic Moved to New Indices

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Eric Volkman

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June 17, 2013

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McGraw-Hill Financial‘s SP Dow Jones Indices is making changes in a trio of its signature products.

After the close of trading Friday, the SP 500 will include Pfizer spinoff Zoetis (NYSE: ZTS  ) . The stock replaces First Horizon National (NYSE: FHN  ) , which is to find a new home on the SP MidCap 400.

In turn, it bumps QLogic (NASDAQ: QLGC  ) from that index to the SP SmallCap 600. Finally, QLogic’s shift completely displaces Coldwater Creek (NASDAQ: CWTR  ) , which will no longer be on the SP SmallCap 600.

The changes have come about because of Pfizer’s attempt to unload its 80% stake in Zoetis, and the pharma giant is offering investors the opportunity to trade Pfizer shares for Zoetis shares. Zoetis engages in the discovery, development, manufacture, and commercialization of animal health medicines and vaccines.

Additionally, in the press release announcing the news, SP Dow Jones Indices said that “First Horizon’s total market capitalization is more representative of the mid cap market space, and QLogic’s total market capitalization is more representative of the small cap market space.”

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Article Source: http://www.fool.com/investing/general/2013/06/17/zoetis-to-join-sp-500-first-horizon-national-qlogi.aspx