JPMorgan Trading Desk activity was on the slow side today as the equity rally extended for another day as the SPX hit fresh YTD highs. Since hitting a low at 1810 on 2/11 the SPX has since rallied ~270 points or ~15% and is now up ~1.8% YTD.
Earnings Tues night/Wed morning were either better-than-feared (CSX) or outright strong (JPM and to a lesser extent ADTN) and that, combined w/the solid China trade numbers, helped power another day of gains (the US retail sales numbers fell short but that didn’t influence trading a whole lot). The Beige Book (out at 2pmET) didn’t really change the narrative (and actually contained some possible headwinds in the form of upside wage pressures).
But as JPM notes, investors remain reluctant about chasing a tape so far off its lows (the inexorable nature of the rally has provided few entry points and it still feels like people are being grudgingly forced in from the sidelines to participate in a rally that remains decidedly unloved).
The bigger picture remains unchanged w/the multi-week advance a function of misplaced sentiment and positioning matching up w/a set of global fundamentals that proved much more stable than investors feared at the Feb nadir.
The Fed-induced USD sell-off, oil rally (helped by the USD, anticipation of a production freeze, and a sig. cutback in US output), and (mild) economic green shoots (esp. China’s Mar data) all helped but the velocity of the move (15% in two months) wouldn’t have occurred absent the abject despondency and deafening recession calls from Jan and Feb.
Investors continue to try to numerically justify the price action.
In Jan and Feb the consensus thinking was assuming a shallow US recession, ~$115 in EPS, and a 15x multiple in order defend pressing the SPX below 1850 (15x $115 would have placed the SPX around 1725-1750).
With the index now threatening 2100 growth is seen staying within its post-crisis average (~2%-ish GDP) w/~$122-123 in EPS and a 17-18x multiple (18x $123 would get the SPX north of 2200).
Some are even beginning to look to ’17 where the (admittedly inchoate) consensus is calling for ~$130-132 in EPS (on that number the PE looks reasonable at ~16x).
However, just as investors had to stretch reality to explain a sub-1850/1800 SPX in Feb, the same is true up at 2075-2100 (although $122-123 and 17-18x is more plausible than $115 and 15x).
Even assuming the USD weakness, oil strength, and better-than-feared Q1 reports, it’s hard to get the ’16 EPS number more than few dollars above $120 and investors should be careful about estimates looking out more than 1.5 years (at this time in ’15 investors were penciling in EPS north of $130 for ’16).
The macro landscape remains a lot more boring than investors give it credit for and just as psychology proved excessively bearish in early Q1, the same may now be occurring on the upside.
The USD is something to keep an eye on – its weeks-long plunge on back of a trio of dovish Fed messages (3/16 FOMC meeting, 3/29 Yellen speech, and 4/6 FOMC minutes) has underwritten a lot of the recent SPX rally (by relieving pressure on China’s CNY and spurring a commodity lift) but it is showing signs of firming now (the DXY rose ~85-90bp Wed) and if this persists it could become a headwind.
Source: JPMorgan
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