The S&P 500
Comment of the Day

August 02 2013

Commentary by Eoin Treacy

The S&P 500

Eoin Treacy's view The Index hit a short-term peak in May and had unwound the majority of its 12.5% over extension relative to the 200-day MA by late June. It rallied persistently throughout July and moved to a new all-time high, above 1700, yesterday. At yesterday's close the Index was 9.7% overextended relative to the MA. A clear downward dynamic similar to that posted in May would be required to check momentum and to suggest another bout of mean reversion is underway.

The S&P's valuations piqued by curiosity so I created this table of its subsectors highlighting historic P/Es and dividend yields. The Index has an historic P/E of 16.42 and yields 2.03%. More than half its subsectors have higher P/Es than the Index. This chart of Its P/E demonstrates the valuation expansion that has occurred since September when the ratio found support near 12. It continues to trend higher and a break in the progression of higher reaction lows would be required to question medium-term potential for additional upside.

Considering the fact that the majority of Index's constituents are trading at multiples in excess of 16, I thought it might be instructive to review some of those on lower P/Es but with attractive chart patterns.

The Other Diversified Financials Index (Bank of America, Citigroup & JPMorgan) has a P/E of 10.52 and yields 1.01%. The Regional Banks Index has a P/E of 11.56 and yields 1.77%. On a P/E basis, they are competitive with the wider market and the banking sector more generally has capacity for dividend growth over the medium-term; not least because it is coming from a low bas e following the hiatus of the credit crisis. While somewhat overbought in the very short-term, sustained moves below their respective 200-day MAs would be required to question medium-term recovery potential.

Pitney Bowes (Est P/E 9.47, DY 4.44%) announced this week that it would dispose of its management services unit in an effort to bolster its balance sheet as it continues to attempt to stabilise its core businesses. The share surged higher, completing its more than yearlong range, and a sustained move below the 200-day MA would be required to question medium-term recovery potential. (Also see Comment of the Day on April 25th).

The S&P500 Systems Software Index (P/E 10.42, DY 2.32%) broke out to new 10-year highs in April and pulled back to test the upper side of the underlying range following Microsoft's plunge last week.

Symantec (Est P/E 13.94, DY 2.27%) broke out to new 10-year highs in February and found support in July in the region of the 200-day MA and the upper side of the underlying range. While somewhat overbought in the short term, a sustained move below the MA would be required to question medium-term recovery potential.

CA Inc (Est P/E 10.16, DY 3.31%) appears to be in the process of completing a more than 10-year base. A sustained move below the 200-day MA, currently near $26.50, would be required to question medium-term upside potential. (Also see Comment of the Day on June 4th).

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