It was another crazy week for stocks, but at least this time it resulted in the major averages rising. The S&P 500 finished the week almost 3% higher closing at 2,485. The latest earnings revisions from Dow Jones S&P Indices for 2019 showed that earnings estimates fell again this time down to $172.10 per share from $172.76 the week before. It means that since their peak in August earnings estimates have now fallen 2.8%, while the S&P 500 has dropped 15% from its highs. It leaves the index trading at 14.4 times 2019 earnings estimates.
I went back and recalculated the S&P 500 PE ratio going back to the year 1988 using the forward twelve months earnings, giving us a more forward-looking take on PE ratio historical. There are some minor difference when considering the PE ratio using future earnings versus using current earnings. In either case, both show the current valuations are approaching their historical lows at below 15.
Could those earnings multiples contract further, perhaps. History shows they have reached levels as low as 11. At 11 times next years, earnings estimate the S&P 500 would be valued at roughly 1,900, 24% lower than its current level. I think it is fair to say that historically valuations for the S&P 500 have been somewhere between 15 and 20. Believe it or not, at 17.5 times 2019 earnings estimates the S&P 500 would be over 3,000. That is, of course, assuming those estimates do not fall further.
If there is some good news from this past week, it is that VIX index hit its highest level since earlier this year rising to around 36. The VIX needs to get back below 26 to see this stock market recover further.
Put To Call
The Put to Call ratio reached some lofty levels over the past two weeks, which would suggest that fear levels are high.
The RSI levels on the S&P 500 have now hit their lowest levels in many years. Previously, that happened in August 2015 and August 2011
From a number of factors it would seem the market may have finally found a bottom, but then again we have thought that before.
Not An Easy Path
But next week will not be easy with Monday being December 31, followed by a holiday, and then coming back with employment reports for the month of December. It isn’t even clear anymore how a strong employment report will be greeted by the market, while it would signal a strong economy, it may also signal more rate hikes. The question is what more important to the market, economic health or the Fed?
I have put in a new trend line for the S&P 500; it will be something to work of for now, and as long as the trend continues to make higher highs and higher lows that may be all that matters for the moment.
If all of this isn’t enough for you, do not worry because earnings will start in about 2-weeks. Then things may really get confusing.
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