Ira Schnell at Kaufman Bros. "Morning Note"

After showing some cracks in the foundation over the last few days, I got the sense yesterday that people were content to look for further evidence of a breakdown before they need to start kicking out their longs and/or laying the shorts out again….Almost like everyone was waiting around looking for someone else to make the first move…Certainly cant blame institutional or retail investors for acting this way, because over the last few months, if you sold after initial cracks in the foundation formed, you got very burned.

Combine that with the fact Labor Day is fast approaching, and maybe we get a pause here before the next move (unless Friday’s non farm payroll # is way off consensus, in either direction)…And after virtually 6 months of equities going straight up, I don’t think you can discount the fact that even if they are going to unwind this thing, you might get one last sucker rally right back through 1010 to 1020, before they finally hit this thing through 970 to 980….I talked yesterday about the key role plain vanilla long only funds will ultimately play in dictating price action if selling momentum increases as we roll into 4Q09 (will they buy on the way down or turn sellers?)…Wanted to throw out one more piece of the puzzle…Short sellers have been taken out on stretchers for months now….I know most have been burned to the point that they would rather short only on weakness than try to top tick this market and run the risk of getting steamrolled (again).

So my point here is if the snowball starts to roll down the hill with regard to sell momentum, and the shorts get in motion, what are there expectations for that trade?.....It seems to me that when you get smoked repeatedly with the same strategy, and that strategy finally starts to work, it is human nature to close out the trade too early and lock in your profit, because you just want to right (I am certainly guilty of that on a personal level)…

And not sure that is all that atypical…So what am I saying here?...I think if this market does come off, short covering should come into play maybe a bit earlier than it would normally, thus stemming the down move (at least initially)….Combine that with a 6 month uptrend which has been firmly entrenched, and I think you could certainly make the case the above scenario might take place…

Although it appears that most of the heavy bleeding in the unemployment picture in the US is behind us, the #’s just don’t paint any kind of picture the biggest problem plaguing this economy has abated…The ADP # yesterday still demonstrates that people are losing their jobs at a pretty healthy clip…And the other huge missing piece of the puzzle (the actual hiring of people) still seems like it is very far away….In fact, I saw something the other day that illustrates this point pretty well…The Robert Half Financial Hiring Index says that 84% of CFOs surveyed have no plans on hiring for the rest of 2009….4% expect to add staff, and 10% see more cutbacks (actually up from 8% from the last survey)….Look out for initial claims out @ 8:30 (consensus is 565k, and consensus for continuous claims is 6.125mil), followed by the ISM non manufacturing out @ 10:00 (consensus is 48).

Source: Kaufman Bros.

Analyst getting it wrong

Analyst have a difficult time predicting future trends. Hence, be careful with estimates as nobody can really forecast the future. Remember the housing bubble, and all the other bubbles we have faced.

Source: Clusterstock

SP500 Overvalued

Jeremy Grantham puts fair value at 880 on the S&P 500. That seems a bit precise. Let's call it 900.

So the SP500 is about at least 100 points overvalued at this point. I think all this momentum seems to be priced into the market. Any earnings warnings or shortfall will get crushed. So proceed with caution at this point.

A number of employment will be out during the next three days. I'll be watching to see how they compared to estimates.

Standard and Poor's Overvalued

After a 40+% gain from the March lows on sub par volume, the S&P 500 seems overvalued relative to the current conditions in the economy. With companies beating on the EPS front due to cost cutting and reduction in head cut, revenue has been for the most part has not matched top end expectations. Hence, although the worst may have come and gone, we are still not out of the woods in terms of excess in the financial markets. With this added global stimulus program, we maybe in for another bubble to burst with the Chinese Shanghai markets up over 90%.

Clearly there is a lag from what actually happens with the economy and the stock market, however if we continue to buy at this point we may find ourselves paying over what the historical value is in the market.

S&P Earnings Fall Dramatically

From ChartOfTheDay:

"Today's chart provides some perspective on the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative."

Source: http://www.chartoftheday.com/20090724.htm?T