Globe and Mail business writer Jennifer Dowty, c. June 15, 2015. Credit: The Globe and MailThe Globe and Mail
Today saw a bullish technical signal in U.S. markets, with the S&P 500 Index, the Dow Jones industrial average and the Nasdaq composite all crossing above their 200-day moving averages. In mid-afternoon trading, the Dow was up 74 points, or 0.5 per cent, the S&P 500 was up 1 per cent at 2,074, the Nasdaq was up 113 points, or 2.3 per cent, and the S&P/TSX composite index was up 74 points, or 0.5 per cent. I believe market momentum will continue to build.
A strong leading market indicator is the number of stocks rising to new 52-week highs compared to those falling to 52-week lows. Although there are few stocks making new highs and new lows, there are more new highs compared to new lows, with shares of Rogers Communications, Laurentian Bank, Sun Life Financial, George Weston, Intact Financial, and two gold stocks - Centerra Gold and Detour Gold - at or near 52-week highs. This compares to just one stock, Corus Entertainment, at a 52-week low. Ideally, you want to see an increasing proportion of stocks rising to new highs compared to those falling to new lows, as well as seeing leadership from a variety of sectors in order to gain confidence that this market momentum may continue.
Investor sentiment is still not overwhelming high, which is bullish. On Wednesday, the weekly AAII Investor Sentiment report, which measure investors' expectations for the market over the next six months, showed a slight uptick in the bullish and neutral camp. Some 34.8 per cent of investors are bullish, up 0.7 per cent from the prior week, 41.2 per cent of investors are neutral, up 2.4 per cent, and 24 per cent of investors are bearish, down 3.1 per cent. Investors surveyed are largely neutral, or sitting on the fence, suggesting that there is further market upside potential since this is a contrarian indicator. When there is a large percentage of bulls, and everyone is optimistic, it typically marks a peak for the market.
The markets have been climbing the wall of worry higher ever since the weak U.S. September non-farm payroll data released on Oct. 2 tilted the odds in favour of the U.S. Federal Reserve remaining on hold and not raising interest rates until 2016. Since then, the S&P 500 index has rallied approximately 8 per cent, and the S&P/TSX composite index has advanced roughly 5 per cent.
On a valuation basis, the S&P 500 Index is trading at a 12 month forward price-to-earnings multiple of 16.8 times, above its three-year average of 15.4 times. The S&P/TSX composite index is trading at a 12-month forward price-to-earnings multiple of 16 times, slightly above its three-year average of 15.2 times.
The third-quarter earnings season in the U.S. has been mixed, but we are finally seeing some concrete signs of hope, which is renewing investor confidence. Industry leaders such as McDonald's, Microsoft and Amazon have reported solid earnings reports. Some 173 companies in the S&P 500 Index have reported quarterly results. Forty-three per cent of companies have reported better-than-expected sales, and 75 per cent of companies have delivered better-than-expected earnings. In terms of growth, 48 per cent of companies have reported positive year-over-year sales growth and 58 per cent of companies have reported positive year-over-year earnings growth. These growth figures have been rising.
In Canada, we are still in the infancy stages of the third-quarter reporting season with only 13 companies in the S&P/TSX composite index reporting earnings to-date. Next week, 30 companies in the S&P/TSX composite index have confirmed they will be reporting financial results.
Here is the bottom line: I believe market momentum will continue to build as we work our way through the traditionally strong fourth-quarter and that we will see U.S. markets revisit their record highs with industry leaders leading the charge higher. The S&P/TSX composite index may lag the U.S. equity markets given its large energy weighting. There will still be market volatility and down days, as a result, I continue to recommend investors accumulate shares of companies with solid fundamentals and outlooks with staggered approach.