Tags: Hugh Johnson | Valuations | Sotck | CNBC
Hugh Johnson Questions Valuations

Hugh Johnson Questions Valuations

By    |   Friday, 07 August 2015 07:54 AM

Hugh Johnson, of Hugh Johnson Advisors, explains that current valuations of stock leave upside potential of only about 1% or a little more through the end of this year and beyond, so he doesn’t think stocks will be interesting until the market corrects, and he emphasized that his concern is shared “by a lot of very savvy investors.”

He added that earnings growth will be modest and the Fed will be raising rates, so it would take “an outbreak of speculation” to fuel an upward move of any significance.

However, a 4% decline would be enough for Johnson to “start to look really hard at some stocks.”

Another panelist, Nicholas Ferres, remarked that he thinks investors are “already depressed,” and the Fed is “still very accommodative, even if it’s starting to normalize rates,” so he can see the multiple expanding to 17 or 18.

Next, Vadim Zlotnikov, Chief Market Strategist at AllianceBernstein, predicts “a collapse in a lot of momentum stocks – biotech, social media – I think they’re in danger … for the next couple weeks.”

He thinks this is due to earnings, not to any pending action by the Fed. He also thinks the Fed “will have to raise rates to maintain credibility.” Zlotnikov’s most positive thought is if the oil price gets to about 35, this is close to the cost of production and would establish a base.

This writer would question the notion that the Fed is motivated by concern for its credibility, because the Fed doesn’t acknowledge any such issue but considers itself infallible and that it is the critics who have to be concerned about their credibility.

Next, Mike Khouw, an Options Action panelist, has identified a big bearish bet on puts on the S&P 500 ETF, switching from a 210 strike price to a 207.5, with a notional value of about $1b. However, Khouw was noncommittal as to his personal view because, like Zlotnikov above, he sees signs of strength developing in the beleaguered energy space.

Finally, the last clip shows one of the most interesting and potentially useful analyses, which has been updated from time to time by Rich Ross, MD of Evercore ISI. He also finds a reversal occurring in energy, but he suspects it is coming at the expense of a long list of former winners.

However, the chart he displays shows what he calls a “bullish divergence,” because the 200-day moving average has served as consistent support. Ross is confident the S&P will hold at 2040 and test the high of 2130, then break to 2180 and 2230, so he urges investors to “stay the course.” He then displayed a chart of the 50-day moving average going back to 2009, which has been tested and held four times. He concludes, “Ultimately, this market goes higher.

Unfortunately, the clip ends before Steve Grasso reacts to the presentation as this writer would have, suggesting that the 200-day MA is flattening and may be setting up to break to the downside. The conclusion was that this is a pattern to watch over the next few months to see how it works out once traders return from the beach and get back to work.

Video clips can be found here:

Johnson: http://video.cnbc.com/gallery/?video=3000404410

Zlotnikov: http://video.cnbc.com/gallery/?video=3000404338

Khouw: http://video.cnbc.com/gallery/?video=3000404335

Ross: http://video.cnbc.com/gallery/?video=3000404332

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Hugh Johnson, of Hugh Johnson Advisors, explains that current valuations of stock leave upside potential of only about 1% or a little more through the end of this year and beyond, so he doesn't think stocks will be interesting until the market corrects.
Hugh Johnson, Valuations, Sotck, CNBC
Friday, 07 August 2015 07:54 AM
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