I don’t usually like to talk about trading (everyone else does that), but I thought I’d chime in on how I view our current levels.
As I wrote in my January 2nd piece outlining my 2011 playbook, my estimate for S&P 500 EPS FY 2011 is $89, and fair value between 13x (1,157) – 16x (1,424).
That leaves us with a reasonable amount of room on both sides. I tend to try to trade opposite strong sentiment, but the past few months have been an exception. Predicting stronger than expected economic (and earnings growth), I saw shorter-term cash forced long under on onslaught of beats, buybacks and inflows.
My favourite barometer of the economy is Initial Claims – and I’m sure you can see the relationship they hold with equities. As long as they keep declining and fund flows chase performance, I think we continue to march higher.
The danger, of course, is the proclivity of a shake-out of overly-exposed short-term traders who are looking for excuses to bail. I haven’t anecdotally witnessed much enthusiasm in the economic recovery in professional speculators. Their cynicism has set them up for near continual surprise, and those unrealised gains really must have been burning a hole in their sell button…