Monday, April 23, 2007

Dow Jones / S&P500
Near Term Importance

Most Asian bourses are a bit wary now that almost all global markets are near or surpassing their all time highs. A lot will look towards the American markets for better guidance and confidence. Dow Jones will easily surpass the 13,000 barrier. The scenario is a bit different for S&P. Though everyone knows Dow Jones index because its been around forever, its not a true indicator of the underlying strength, depth and direction of US markets. The DJ only has 30 stocks, compared to the 500 for S&P. The trouble for S&P index is that some 30% of the 500 are in technology. Most are still some 50%-60% from their bubblish peaks during the internet-zany days. Hence for the S&P 500 to scale past its all time high would take a lot.

That's the not so good news. The better news is that all things being equal, how the tech stocks perform over the near future would determine to a large extent the vibrancy of the S&P 500. As most are still a long way from their highs, we have to examine the likely trends to get a better picture from the tech stocks. Nasdaq would provide a decent guide. Recent spate of earnings from leaders such as Google, SAP, Xerox would point things are headed north. So-so stuff from Intel and IBM are the flip side of the coin. However some concerns are there over reduced corporate spending which would hurt the tech side. So, watch for this week's release of earnings from Texas Instruments, Apple and Microsoft for further guidance.

To get a better grasp of how much more the S&P can go: from the first day of this century till now, the DJ is up some 30% (inclusive of dividends) while the S&P 500 is up around 1%. On fundamentals, the S&P 500 stocks are yielding about 6.4% while the 10-year Treasuries are clocking in at 4.6%. The gap is still there which provides good support for buyers of stocks. As cash holdings are still at an all time high for corporate America, its only prudent that they step up their share buyback programs till the spread narrows significantly. Same way, I would start getting bearish if the gap is less than one percentage point.

Besides earnings, we can expect a slew of M&A and private equity buyouts as PE firms jostled to get ahead of the pack to invest while interest rates are still favourable. These buyouts will inevitably push up prices of same industry class stocks.

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