Courtesy of Scott Martindale, Sabrient Systems and Gradient Analytics
It comes as no surprise that stocks are struggling to break through technical barriers at Dow 13,000, Nasdaq 3,000, and S&P 500 1370. I continue to believe that it will require greater market breadth and trading volume to achieve a major breakout. Even though Fed Chairman Bernanke on Wednesday threw a wet blanket on the bullish flame by playing down economic recovery while giving no hints about further quantitative easing in his semiannual testimony to Congress, the market still wouldn’t sell off much. Apparently, his cautious words can’t override his stimulative actions.
Among the 10 U.S. sector iShares, Technology (IYW), Financials (IYF), and Consumer Services (IYC) have been the leaders this week. No surprise about IYW given that high-flying Apple Inc. (AAPL) makes up 18% of the ETF. As it turns out, IYW and IYF are also the top ranked sector ETFs in this week’s Sabrient rankings.
It’s a nice change of pace to not see European sovereign debt as the top headline lately. Although avoiding a Greece debt default is still not a certainty (or even a high probability), there are definite signs of stability in the eurozone–at least for the moment. Bond rates in Italy and Spain are below “critical” levels.
Still, austerity requirements from its rescuers have plunged Greece into a deep recession. The Greek economy contracted by 7% during 4Q2011 and unemployment is about 20% (46% among the younger workers). And there is a lot of doubt throughout the international community that Greece has the will to pull it off in the face of violent anti-austerity protests. Spreads on Greek 5-year Credit Default Swaps have risen such that the market has essentially priced in a Greek default. The market would next watch for a possible contagion spreading to Italy, Spain, Portugal and Ireland. Furthermore, S&P cut its outlook on the European Financial Stability Facility (EFSF) to negative. Nothing is coming easy in solving this crisis.
But here in the U.S., near-term signs continue to brighten. Despite the steep rise in the major averages, valuations are still reasonable on a historic basis. The forward (i.e., using next year’s consensus earnings estimates) price-to-earnings ratio (P/E) for the S&P 500 is about 13x. This contrast favorably with the historic average of 15x over the past 10 years.
Of course, the forward P/E comes with uncertainty. If…
