Catching a Falling Knife, a technical and fundamental perspective

Posted: Aug 21, 2015 10:56:54 AM

We have been warning all year that markets have been fairly valued to fully valued with certain buying points on dips. Technically, the markets are oversold, but yesterday’s break of the S&P below 2040 is a milestone. The next support levels are 2011, 1990 and then 1972. That is 1.2%, 2.2% and 3.1% lower from yesterday’s close. The ultimate break would be the October 2014 low of 1848 which would be 9% lower. (We think that would be tough to get to) Fundamentally, investors should focus on 2016. If we look at the estimates for 2016 earnings, the market would be trading at 15.5 times earnings, which no longer implies an expensive market. For 2017 , the markets are trading at roughly 14 times estimated earnings, which is the long run average.

The old expression of “Don’t catch a falling knife” seems to come into play with market downturns. However, at this point, we would leg in on further weakness. The technical break yesterday is not good, but fundamentally, it does present a buying opportunity. As per our 12/31/2014 quarterly commentary, we were looking for single digit returns for 2015 and 2016. We still believe that is fundamentally intact. Please feel free to call us.

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