Weekly Chartology And Outlook: Mutual Fund Outflows And Stalling Growth Momentum

Tyler Durden's picture

Despite near record corporate earnings, the S&P has continued to trend lower for 6 weeks: the longest drop since 2002 as reported yesterday. But have no fear: Goldman's David Kostin summarizes the upside/downside potential of the market (1450/1210 on the S&P), and the key bullish and bearish factors that help determine the current outlook. "Discussions with clients this week focused on the risk/reward balance for US equities. Our forecasts reflect a 2:1 upside/downside return profile through year-end 2011. S&P 500 has declined by 5% from its April 29th closing high of 1364. Our year-end 2011 index target remains 1450 representing 12% upside from current levels. A downside scenario suggests an index value of approximately 1210 or roughly 6% below current levels." Also, Kostin is confident the current sell off is overdue to reverse "During the pull-backs the median length time for the market to reach bottom equaled 27 days. Six of the episodes took 20-40 days and on four occasions the decline occurred in less than two weeks. The current sell-off has lasted 41 days and counting. The historical episodes we analyzed had a median time to recover of 41 days. Recoveries during 2003-07 typically took longer than the speedy rebounds since 2009." Needless to say comparing the current centrally planned regime to any other time is futile, and we completely disagree with his assessment.

More from Kostin

Looking ahead, bullish arguments include positive EPS revisions, loose financial conditions, undemanding valuation, and lower options skew. Mutual fund outflows and stalling growth represent risks to our outlook.

Growth: disappointing reported and forward-looking economic growth metrics have led the market lower. Reported economic data has been below consensus since April. Our Economics team’s June US MAP score was the lowest since our data series began in 2001. We  estimate the market has reduced its outlook for US GDP growth by about 50 bp to 2.5% since April based on our US Wavefronts Growth basket. Our earnings model suggests that a 50 bp shift in US GDP growth translates into $2 in annual EPS. Our current estimates include annual average growth of 2.6% in 2011 and 3.2% in 2012. If GDP growth is only 2.1% in 2011 and 2.7% in 2012 our EPS estimates would fall to $94 and $101, respectively.

Earnings: S&P 500 consensus 2011 and 2012 earnings estimates are up during the past month. The same is true for six of ten S&P sectors. Our earnings revisions sentiment indicator, which measures the balance of positive and negative revisions, is also positive for eight sectors. Broadly speaking, earnings estimates have risen for the market and most sectors, providing support for fundamental investors ahead of the 2Q earnings.

Valuation: remains reasonable with attractive risk/reward, in our view. S&P 500 P/E is just 12.5x (on forward 12 month consensus EPS) and 12.9x relative to our forecast EPS. The S&P P/E multiple has averaged 13x since 1975 and more than 16x since 1990. Valuation is similarly modest on a P/B basis, particularly given our 17% estimate of S&P 500 ROE. At this time last year, when investors worried about a possible double-dip US recession in 2H 2010 and Europe sovereign credit defaults, the S&P 500 P/E multiple was 12.0x our estimates. Applying that multiple to our 2012 EPS estimate under a lower growth scenario yields an S&P value of 1212 (12 * $101), 6% below the current level but attractive risk/reward vs. the 12% upside to our yearend target of 1450.

Fund flows: have turned negative. Domestic equity mutual funds have experienced outflows in four of the past five weeks totaling $3.5 bn. Funds started the year with just one week of outflows during the first four months and cumulative inflows of nearly $30 bn.

Risk sentiment: has lagged the market sell-off. Options skew, a measure of downside risk sentiment, has actually declined during the market sell-off. Implied volatility has moved higher but less than might be expected: 1-mo. implied volatility is up 3 points since April 29th. Historically, the latter part of business cycle expansion includes lower, but still positive, returns and higher realized volatility that lower risk-adjusted returns.


Kostin 6.10

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sellstop's picture

There will be a rally in here somewhere...

Oil looks weak now, tho...

DUG vs. DIG....



richard in norway's picture


Sell! Sell! Sell!

RobotTrader's picture

Phil Grande says the PigMen are at the "point of no return" right now.

He says they are going to try to turn the market on Monday or Tuesday by jamming the banks. Saw hints of that on Friday.

If they are successful, the said you must be fully invested in bank stocks and mining stocks. If the rally is successful, then we could have another big leg up.

However, if the rally fizzles after a few days, then the attempt will have failed and he says well will be busting through the 200-day like butter and the market could be headed back down to 6,500.

Told everybody that if the SPY fails at 125, then everybody must be out of stocks comletely. I fully agree with him.


sellstop's picture

Yes, my take on the stock markets is that this selloff was just the first break. There will be a rally here soon. The quality of that rally will tell a lot. And when it breaks down, look out below.


Village Idiot's picture

"Phil Grande says the PigMen are at the "point of no return" right now."

lol, for those who don't know who Phil Grande is, please take the time to listen to the guy.  You may get a better understanding of Robo's "message." Phil Grande embodies ZH attitude towards the "PigMen."  Cheers.

Cdad's picture


A lot of people "say" a lot of things.  As well, a lot of charts say a lot of things, too.  

My favorite chart right now is here:  http://stockcharts.com/freecharts/historical/djia19201940.html

If you look closely, the Great Crash came in 1929 and "ended" when the DOW hit 198 [down from 381].  Of course, the Great Depression was everything that came after that, which included a really nice bounce back to DOW 294 ...at which time, a great many people "said" things: http://www.iraq-war.ru/article/120692  BTW...seems to me that old Calvin got the last word.  And here as plotted on a graph of the DOW:  http://greatdepression2006.blogspot.com/2007/08/famous-quotes-from-past-revisited.html

That great historical chart chart of the DOW does not overlay or compare well with today's Dow chart [from 2007--2011]...but this is because we spent $7 trillion trying to thwart the inevitable.  

Anyway, considering that the $7 trillion is now gone, don't you think the enevitable is next?

Zero Govt's picture

you can see how impotent Benny is at floating asset classes with the carnage in the US property sector ...once buyers dry up there's nothing the Fed can do

but don't think this is the 'Big Dipper' for the stock markets (yet)... a correction to S&P 1,200, maybe 1,100 and then another slow painful grind-up through the summer

...2012-14 is when the fireworks really kick off with Credit Crunch II ...even bigger than CCI because of the $7 Trillion added to the furnace since

Caviar Emptor's picture

Your official Wall Street weekend news update: The stock market has gotten cheaper since 2009 and we're giving stocks away. This is an opportunity to get rich quick to make up for all your losses and your low self-esteem. Amaze your friends! Impress people at cocktail parties! 

So here's the plan: First, get money. We don't care how you do it. Second, give us all the money. Third, get rich quick. 

Why are we sharing these secrets with you? Because we already got so rich we want to share the joy and become teachers. Also we were such cut throat thieves, liars and con artists before, now we want to do some good to make up for it. 

warchopper's picture

Phase I: Collect Underpants

Phase II: ?

Phase III: Profit!

Hedgetard55's picture

A last gasp effort to draw in bag holders, in this, the mother of all sucker rallies.

Caviar Emptor's picture

Shortin' it to the dips buyers 

Caviar Emptor's picture

Remember what uncle Warren said: If everyone sells I buy...but don"t do the opposite. Don't argue, just don't

Alex Kintner's picture

Sounds like Goldman wants to do some work on your Backend.

snowball777's picture

That kidder, using octal again...here's the conversion to decimal...808/648.

Dollar Bill Hiccup's picture

QE3 is the rally back into USTs by letting the equity markets and commodities go. It is already underway. The banks buy. Everyone else follows. Yields drop. The deficit is funded. Was that the deal with the devil that POMO presented to the Primary dealers? Thou shalt not have any down days trading. But one day, I will come to ask a favor. A mix between Mel Brooks and the Godfather. 

Maybe the housing market improves. Probably not, even with a 2.5% 10yr yield. Maybe so, you never know. The USD rallies in all of this. No more printing, equities down, commodities down, dollars are destroyed. It gets deflationary. Panic.

Wash, rinse, repeat. If you think this is either the end or the beginning, you are mistaken. It is a repetition of what has recently passed. Take advantage of it. At any rate, buckle up.