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The Market's Measure
What’s Up With Stocks?

What’s Up With Stocks?

Who’s reading equities better? Analysts or investors?

As earnings seasons go, this one’s been so-so.  Most all S&P 500 companies have reported their Q2 numbers. Among them, 81 percent have met Street expectations, 12 percent have beat estimates and 7 percent missed. That actually doesn’t seem so bad.

Drill down a bit, though, and you see the slowdown in earnings momentum. While EPS is up 4 percent over Q1, year-over-year earnings are down nearly 19 percent.

Consensus estimates for Q3 earnings aren’t very pretty: down nearly 5 percent sequentially and off 23 percent from last year.

Such ciphers understandably make equity investors nervous. Some investors, but not all. Of late, there’s been a risk resurgence among stock punters. You can see this reflected in the price spread between the SPDR S&P 500 ETF (NYSE Arca: SPY) and the iShares S&P 100 ETF (NYSE Arca: OEF). If the S&P 500 is touted as a blue-chip benchmark, the S&P 100 must be the bluest of the blue.

There’s a parent-child relationship between the two S&P indices. One hundred of the S&P 500’s largest-cap issues are carved out to populate the S&P 100. Nearly 80 percent of OEF’s constituents are so-called “giants” with market capitalizations exceeding $100 billion. You know, the likes of Exxon Mobil Corp. (NYSE: XOM) and Apple Inc. (Nasdaq: AAPL). Mega-cap stocks make up only 50 percent of SPY’s components, leaving more room for smaller stocks.

Look at the chart below. It portrays the SPY-OEF price premium. SPY gets pricier, comparatively, when equity investors are ebullient; the ETF cheapens when gloom pervades. The premium, thus, is a barometer. As you can see, clouds appeared on the economic horizon back in May. Then, a squall broke out when the Chinese devalued the yuan this summer, sending the SPY-OEF premium careening south of its 50- and 200-day moving averages. The uptrend extending from the 2009 market bottom, however, remained intact. 


Click to Enlarge


The premium’s bouncing upward now, getting back above its 50-day moving average and looking to challenge its 200-day average. Thursday’s market action sent its weekly MACD (Moving Average Convergence-Divergence) reading positive for the first time since March.

So, are we out of the woods, equity-wise?

That depends on who you decide to believe. Analysts predict a less-than-sterling earnings environment in Q3. Investors seem to be voting with their feet. And their wallets.


Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

TAGS: Equities ETFs
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