Strategists at Credit Suisse entered 2010 with a very cautious tone and an outlook similar to our own – 2010 would be a year of halves. The first half would be a continuation of the trends that helped the market surge in 2009 while headwinds would build near H2 2010 and result in market declines. The recent downturn in stocks hasn’t changed their outlook and they view the sell-off as a buying opportunity (see JP Morgan’s similar outlook here as well as Raymond James’ outlook here).
The team’s tactical indicators are mildly bullish at current levels and quickly approaching levels that were buys in 2009:
Our tacticals are mildly supportive of equities:
Interestingly, the % of nyse stocks trading above their 10-week MA (currently at 32%) is around similar levels where market bottomed during recent corrections (end of Oct it troughed at 30%, in early July 09 at 37%). Normally a buy signal is when this indicator falls below 20% but perhaps most of the correction has already occurred??
Sentiment data also supports their bullish thesis as the majority of investors remain net bearish:
Like us, Credit Suisse sees continuing strong trends in the earnings picture which makes it very difficult to formulate a thesis for a substantial decline in stocks. Credit Suisse notes the very strong trend in earnings expectations, the high level of “better than expected” earnings and the uptrend in the upgrade cycle. Bespoke recently noted the outperformance on Monday’s over the last few months. This has been largely due to the upgrade cycle. Yesterday alone, there were 41 upgrades of S&P 500 firms versus 13 downgrades according to Briefing.com. One of the primary reasons we focus a great deal of our research at TPC on the earnings cycle is due to the high influence analysts have on the market. According to Credit Suisse, analysts on average, upgrade stocks for 11 months prior to the beginning of a new uptrend in the bull market cycle. This means we could see a strong continued trend in upgrades until Q2 of 2010 – roughly around the same time where we believe earnings outperformance will begin to dip substantially and earnings estimates will begin to rise dramatically.
All of this leads Credit Suisse to maintain their bullish stance:
Bottom line: we are not changing our fundamental view and stay overweight equities targeting 1,220 on the s&p by mid-2010. We admit that near-term pressures remain: (i) worries about China’s “tightening”- which we think are exaggerated, (ii) Greece (and rest of peripheral Europe)- we have been negative on peripheral Europe for a while, especially Spain (we would u/w domestic Spain); (iii) Obama’s proposal on banks (uncertainty unnerves investors, we are underweight Eur banks). We would buy equity on dips, especially plays on Chinese consumer (e.g. luxury goods).
Source: Credit Suisse
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.