Financial Markets Alert – October 14, 2011
Stocks Outperform for the Week
Financial Market Impact
Dow Jones Industrial Average 11,644
West Texas Intermediate Crude Oil (barrel) 86.67
S&P 500 1,224
For the week ending October 14, 2011 stock market indices increased between 4.87% and 8.59%.
o Dow Jones Industrial Average +4.87%
o Standard and Poor’s 500 Index (S&P 500) +6.00%
o NASDAQ Composite Index +7.60%
o Russell 2000 Small Cap Index +8.59%
What Does This Mean for the Remainder of 2011
At DCM LLC our research indicates a clear improvement in the outlook for stocks. It is our conclusion that the first two weeks of October are probably the start of a larger sustained rally for the following reasons:
• European Financial Crisis– The recent decline in global stocks was almost entirely the result of the European Financial Crisis. It now appears that the European Union along with partner countries and the International Monetary Fund is on the verge of an effective plan to restructure Greece and stem the region’s debt issues. This development would remove a significant hurdle for stock investors.
• Corporate Earnings – Third quarter corporate earnings are being reported stronger than anticipated. Stock prices are highly correlated to corporate earnings. Although only a small percentage of companies have announced financial results, the early reports are quite positive.
o All nine companies from the S&P 500 that have reported third quarter earnings this week have announced positive results.
o Seven out of nine of the companies have exceeded analyst consensus estimates (Bloomberg, LLP).
• Stock Valuations – Even after this week’s stock market rally, the forward price-to-earnings ratio on the Russell 3000 Stock Index (total market index) is only 13.02 times.
o The average price-to-earnings ratio since 1995 of the Russell 3000 Stock Index is 20.71 times. This creates opportunity for stocks to appreciate as they return to average historical valuations.
• Technical Indicators – At DCM LLC we are fundamental analysts and investors. However, rallies in the S&P 500 peaked on August 15th at 1,204, August 31st at 1,218, September 16th at 1,216, and September 27th at 1,175 creating what appears to be a resistance level at 1,219. The close for the S&P 500 on October 14th was 1,224 which broke through the resistance level and will likely gain the interest of technical investors that could increase the demand for stocks and provide additional support to the rally.
• Volatility – Volatility is here to stay. However, this can work to an investor’s advantage. As a positive trend develops, more of these major stock market moves should occur on the upside.