Maltbie's Minute on the Market: What to Expect from Earnings Season

Robert Maltbie |

The market has been slammed down and then up, while our indicators go neutral.

Greece has proved to be Optimus de minimis, and is discounted by the market for now.

The rigged market in China is also being absorbed at this time. While only 9% of the Chinese population actively participate in the country's stock market, it is unlikely to create a severe economic slowdown.

Our indicators are at 53 currently, indicating low neutral territory and largely driven down by exogenous factors from abroad.

Our sentiment indicator is slightly negative and the recent rebound has moved the put-to-call ratio up into negative territory. However, this has been offset by the pundit indicator where bears exceed bulls, which is a good sign.

The technical indicators are also negative, weighted down by broader market indicators such as the equal-weighted Russell 1000 and the NYSE composite, which are still below 200-day moving averages. This hints at a narrowing participation to the upside. Last week, during the sell-off, more than 50% of NYSE issues were below their 200-day moving averages. Other important indices lifted above key 200-day moving averages this week, offsetting the negativity somewhat.

The driving force of the bull market, our liquidity indicator, continues to impress. Inflows exceeded $41 billion into our market last month, spurred by a huge $19 billion merger in health care between Aetna (AET) and Humana (HUM) .

Now for our Earnings momentum indicator, which we will focus on as we enter earnings season. The headline EPS number for Q3 is negative and EPS is only expected to grow about 1% for 2015. But we think the market will focus on the " shadow estimates", which discounts the steep decline in oil and strength of the U.S. dollar, and look for a  6% estimated EPS growth for the rest of the market sectors on balance. We believe the bar for this quarter is set low and this will provide a lift to the upside.

Now for Yellen and the Fed. Our monetary indicator is positive. Our adjusted monetary indicator, adjusting money supply and velocity hints at very supportive conditions, with a reading of +380 basis points of stimulation. With the Fed jawboning about rate hikes this year, the market is pricing in rate hikes of 50-60 bps in the next six-to-nine months.

On balance, our valuation indicators are positive. The PE multiplier is 18% below fair value, EPS growth is expected to be in the vicinity of 6% over the next year, adjusted for risk, we feel the U.S equity market is 10% undervalued. It is important to note that we expect real returns, adjusted for inflation, to be greater than historical norms.

We are focused on earnings season, and the bar is low with our indicators neutral. We believe the risk is to the upside and will look for a rally in the dog days ahead.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
HUM Humana Inc. 206.70 3.70 1.82 898,376
AET Aetna Inc. 129.30 0.65 0.51 2,449,135

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