Two Reasons the S&P 500 May Still Be Overvalued

“House of Cards or Best Buying Opportunity in Years?”

That’s what a RIA asked me at a “Back to School” event last week for my son.

He said that he’s getting inundated with so much conflicting research that he basically feels paralyzed because he can’t cut through it all and get a clear vision on:

  1. What’s Really Driving the Market
  2. Whether Stocks are Fundamentally Cheap, Fairly Valued or Expensive.

And, all this “noise” is preventing him from having a clear opinion on whether this is just a correction in an upward trending market, or the end of a 6 year bull run.

He said he’s been (appropriately) conservative from a risk standpoint, but we all know that at some point clients get greedy and want better returns, regardless of the risk, and he is getting nervous about being able to put up a positive numbers this year, seeing as we’re basically at the start of the 4th quarter and the S&P 500 is still solidly negative year to date.

So, he’s faced with this dilemma:

How can he stay vigilant to another significant breakdown in stocks, while still keeping his clients in tactical strategies that can outperform in the meantime?

Here’s how we solve that dilemma at The Sevens Report:

1. We watch all assets classes every single day,

2. We find strong risk/reward opportunities to tactically outperform, and

3. We identify and monitor leading indicators across markets that will give us a “warning sign” for that ultimate big correction.

That’s what we do every day for subscribers to The Sevens Report, so that those advisors can make sure they have an independent analyst that communicates with them every day and quickly identifies for them the risks and opportunities for:

  • Stocks
  • Bonds
  • Currencies
  • Commodities, and
  • Interprets what economic data means for the market. 

And, that’s why this gentleman subscribed to The Sevens Report – because he trusts us to

1) Watch markets while he is out getting more clients and

2) Give him talking point and tactical strategies that can help current clients outperform.

The Sevens Report is the daily market cheat sheet our paying subscribers use to keep up on markets, seize opportunities, avoid risks and get more assetsAnd we firmly believe we offer the best value in the independent research space.

We want to help our subscribers cut through all this “noise” in the market.

So, in the paid edition of today’s Sevens Report we provided a valuation analysis of the S&P 500, and clearly identified levels where the S&P 500 is “Cheap,” “Fairly Value” and “Expensive.”

We’ve included an excerpt of that analysis below:

Market Valuation:  Cheap, Fair or Rich? (Sevens Report Excerpt)

Now that an interest rate hike is basically off the table until December, the issue of market valuation is emerging as the major influence on stocks between now and year end.

The major question facing investors from a market valuation standpoint is:

“What is the right 2016 S&P 500 earnings per share (EPS) number?”

It’s been falling all year, but the general consensus now is that it’s $130 (so, if you totaled up all the full-year EPS of each of the S&P 500 companies, you’d get $130).

The problem is that most people don’t expect 2016 EPS to stay at $130.

Instead, it’s expected 2016 EPS will drop to $125, or maybe even $120.

And this matters a lot to client portfolios.

If expected 2016 EPS drops to $120, then the S&P 500 could easily fall another 8% – 10% from current levels before the market is a fundamentally “Cheap” on a valuation basis.

Conversely, if expected 2016 EPS stays at $130, the Fed raises rates and the economy continues to improve, then stocks could easily rally 15% from current levels and still not be “Expensive” on a valuation basis.

So, advisors and investors need to know two things going forward:

  • First, they need to know the specific levels of the S&P 500 that constitute where it is fundamentally “Cheap,” so they can buy the dip and seize the opportunity for longer term accounts.
  • Second, advisors and investors need to know what the outlook for 2016 S&P 500 EPS is, because depending on whether it’s $120, $125 or $130 that will have a large impact on whether or not the market is cheap or expensive on a valuation basis.

To help our paid subscribers, we

  • Provided a “Valuation Table” in today’s issue of The Sevens Report that they can print out and put on their desk that shows them at what level the S&P 500 is “Cheap” depending on expected 2016 earnings.
  • Assured them that we will be keeping them up on expected 2016 EPS changes and most importantly what they mean for valuation of the S&P 500.

And, that’s really important right now, because the Q3 earnings season, which starts on October 8th will have an impact on expected 2016 EPS and the stock market as a whole. 

It’s not going to be an easy finish to 2015.  Between now and the end of the year, we will learn:

  1. Whether the Fed will actually raise rates in 2015
  2. Whether the Chinese economy will stabilize
  3. Whether the ECB will do more QE and
  4. What is the 2016 S&P 500 forecast.

All of these events have the potential to create a lot more market volatility, and getting them “right” likely will be the difference between a positive 2015 performance and a negative one.

Start your quarterly subscription to The Sevens Report today (it will get you through the end of the year) and make sure you have daily market coverage you need to successfully navigate these events.

Given the return of market volatility I am extending a limited time, special offer to new subscribers of our full, daily report that we call our “2 week grace period.” If you choose to cancel your quarterly subscription anytime during the first two weeks, we will give you a full refund.

Click this link to start your subscription. 

Signs of a Bottom or Just a Head fake? (Sevens Report Excerpt)

We continue to monitor our “Six Steps to a Market Bottom” and while there has been some additional progress made, it’s still way too early to declare an “All Clear” in stocks.

1. Markets need to see competence from Chinese authorities. Accomplished Three Weeks Ago. Chinese authorities cut one-year lending rates, lowered reserve requirements, initiated liquidity injections and began to outright buy stocks to support the market beginning last week. But despite all of the efforts, the market continues to have a confidence problem with Chinese leadership that needs to be further resolved, which is likely achievable by ongoing and further efforts to induce stability in the markets.

2. US economic data needs to stay decent. Accomplished Last Week. The August jobs report was stronger than the headlines implied and the truth is that (so far) US and European economic data is not being negatively affected by the China turmoil.  That was further confirmed last week by the JOLTS data and this morning’s August Retail Sales Report.

3. People need to get back to work. Accomplished This Week.  It usually takes a few days for trading desks to get back to full staff after Labor Day, but with the Fed behind us, trading desks have once again returned to full staff, which should help eliminate some of August historic volatility.

There are three critical, remaining “Steps” that have to be met before we can confidently say a bottom is “In.”  One of those steps could occur later this week, perhaps even today.  Our paid subscribers know the remaining three steps that need to be completed and we just updated the outlook for each of those steps in Monday’s Report.

In volatile markets it pays to be patient, so that’s what we are doing. 

Subscribers trust us to alert them first thing each morning if another “Step” has been met – because we do not want to miss the opportunity of buying this dip, should the market continue to stabilize.

Make sure you have an analyst team working for you that’s committed to helping you seize this potential opportunity in stocks, while also staying vigilant to a further decline.

If all we do is help your successfully navigate this challenging environment for the remainder of 2015, it will be well worth the quarterly subscription cost.

Click this link to start your quarterly subscription for just $65/month ($195 total). 

Make More Money, Save Time, Have More Knowledge

Again, this is a results business. Our job is simple – wake up every day and try to find fundamentally based, attractive risk/reward set ups that we think can make money. We did it in both 2013 and 2014, and I’m confident we can continue to do it in 2015.

My job, not just through this latest jobs report and upcoming Fed meeting, but through all sorts of market tumult, is to provide you the timely, need-to-know, critical information that will demonstrate to your clients:

1) That you are on top of the markets, and

2) That you are in control of their financial situation.

Actual subscribers to The 7:00’s Report have told me that discussing the information contained in the Report with prospective clients has helped them land accounts as big as 25 Million Dollars!

2015 is going to continue to be a volatile year. Subscribe today and give yourself the market intelligence you need to help strengthen relationships with your current clients, and acquire new ones.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, so there’s simply no reason why you shouldn’t subscribe to The 7:00’s Report right now.

If you want to make your business more successful, you have to possess unshakeable confidence in your knowledge, and helping you acquire that knowledge is what The 7:00’s Report is all about. Begin your subscription to The 7:00’s Report right now by simply clicking the button below:

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65 dollars.  To sign up for an annual subscription, simply click here.


Tom Essaye,
Editor of The 7:00’s Report

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