US markets in tantalising position

Fundamentals are the new reasoning for caution as commentators are pointing to overvaluations, astronomical multiple expansion and the earnings unable to match price.

Source: Bloomberg

However the old adage that ‘the market can be irrationally wrong longer than you can be solvent’ is certainly one line to remember here as these predictions have been talked about now for over six months.

What is interesting about drawing a fundamentals conclusion ahead of earnings season, particularly when price and multiples are not in line is the narrowing that occurs on earning releases.

On current analyst estimates are some double-digit earnings. That would see the multiple expansions being justified and another reason for the market to grind higher.

I am certainly nervous about the fact that volumes are low, volatility is low by historical standards (however has jumped up 16% in the last week) and the hot money is slowing. However it is yet to take flight and having seen Alcoa record better-than-expected EPS and NPAT numbers overnight, the analysts’ prediction look to be on the money.

This puts the next four months of market trading in a tantalising position. Will we see markets grind higher due to the US seeing bottom up support for the ‘self-sustaining economy’ data and comments of the past six months?

Will the end of the asset purchase program prompt further questions about lofty price premiums? And will that trigger the sell-off most are predicting?

Europe may already be starting to show signs of strain with three consecutive trading sessions in the red. However again the future estimates for earnings are quite positive for Europe and will that allow the market to shrug off the concern?

What is clear is that the calmness in the volume of trading and the nervousness around direction will continue to make trade difficult, however the trend is your friend and therefore with the uptrend still in place the grind looks still to be on.

Ahead of the Australian Open

The moves in the Europe and the US are finally pulling on the market. I am currently calling the Australian market down, by 24 points to 5487 on the 10:00am (AEST) bell off 0.4%.

Iron ore bounced back overnight to $96.50 and with China’s CPI due this morning further signs of growth may help the red ore higher however stockpiling is heading back to oversupply levels and Chinese steel mills are now running much leaner ships than 12 months again as fiscal regulation hits home.

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