• Our message for the period immediately ahead continues
to be that we expect some stabilization in the stock market
before the end of November. We recommend adding to equity
exposure below 1,400 on the S&P 500 and below 3,600 on
the NASDAQ composite.
• Recent selling pressure appears to represent typical end-of quarter
and fiscal year-end jitters. Mutual funds may continue
their house cleaning into the end of October. Pressure from that
kind of profit-taking would probably be most evident in the
groups that have been among the poorer performers so far this
year (i.e., technology in the short term). As we see it, deteriorating
sentiment should contribute to a fourth-quarter buying opportunity.
• The recent spate of decreases in earnings estimates should
not be seen as a new negative in the market’s picture, in our
judgement. Analysts’ earnings-estimate-revision activity almost
has a negative bias between September and the early
part of the following year.
• Multiple convergence continues to support emerging
leadership in the S&P 500 and the technology sector. Investors
interested in stock with growth at reasonable price
multiples have been seeing those PIE ratios creep higher
even as the more expensive multiples have retreated. The
S&P sectors that are unlikely to be potential beneficiaries of
that trend, in our view, are tech, healthcare and financials.
• The growth in the M3 measure of the money supply has recently
accelerated. That bodes well for an eventual stabilization
in equity prices in the fourth quarter.
• Non-auto consumer cyclicals and capital goods/technology
hybrids remain attractive. Looking at all of the S&P sectors, we
continue to suggest that investors have overweight positions in
energy, technology, and utilities; neutral positions in capital
goods and consumer cyclicals; and underweight positions in
basic materials, communications services, consumer staples, financial
services, healthcare, and transportation.
