Tale of Two Senior Analysts At Goldman Sachs

No one can accuse Goldman Sachs of not catering to every possible investor with its latest advice about the U.S. stock market outlook in 2014.

If you are bullish on the U.S. stock market, the switchboard at Goldman will connect you with Senior Investment Strategist Abby Joseph Cohen who is "constructive" for 2014. If you are bearish, the switchboard will connect you with Chief Strategist David Kostin, who says the market is overvalued.

In an interview with Barron's Magazine for this weekend's edition (as published Saturday, January 25th), Ms. Cohen said the following:

1. We (her team at Goldman Sachs) are constructive for 2014, with earnings growth for companies in the S&P 500 Index expected to rise in the high single digits, or about 8%.

2. We expect full-year earnings for the S&P 500 to total $116 in 2014.

3. Given continued low interest rates and low inflation (<2%), "we" could see a price/earnings expansion from the current 16x to between 18x and 20x. 

4. Based upon these forecasts, Ms. Cohen sees the S&P 500 reaching 2088, or +16.65% from Friday's close (January 24th) at 1790.

On January 11th, almost two weeks ago, Goldman's Chief Strategist David Kostin issued the following (timely) research note to customers:

"The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x): (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings."

"We believe the S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x [Abbey Joseph Cohen, perhaps?]. We explore valuation using various approaches. We (Goldman Sachs) conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history."

Ms. Abby Joseph Cohen and Mr. David Kostin both use "We" when communicating their team's view of the market. Since their views seem to be at opposite ends of the spectrum, We (the reader) can only conclude that they both have completely different teams and/or they don't communicate with each other and/or they don't believe that a consensus forecast might better serve their clients.

So who is right?

While Mr. Kostin doesn't make a forecast in his latest bearish research note, the implication of his commentary is that his team at Goldman Sachs expects a significant correction in the S&P 500 Index in 2014, and maybe even a sustained bear trend.

Bottom line: My analysis strongly suggests that the plunge in U.S. and global equity prices on Thursday and Friday of last week marked the very beginning of the first stage in a major new bear market. Weekly chart sell signals were triggered by my computer trading program in the following benchmark indices last week: DJIA, DJTA, NYA (NY Comp), RUT (Russell 2000), XAL, BKX XBD, DIA, DVY, IYT, IWM, and IWN. And weekly chart sell signals were triggered in the following widely held market leaders: AMZN, BA, DIS, FB, GOOG, HON, MMM, TXN, TOL, and UTX, among many others.

Please see the attached Weekly Bar Charts for the Dow Jones Transportation Average and the New York Composite Index with all computer-generated signals clearly marked.

It is my strong belief that U.S. equity prices will continue to decline over the coming week (this last week of January) and that Monthly Chart Sell Signals will then be triggered by my computer trading program in most major stock indices. In the S&P 500 Index, the last time a monthly chart sell signal was triggered was in July 2007 at SPX 1455. This was followed by a 54% correction to a low of 667 in March 2009 where a monthly chart Buy Signal was then triggered. Prior to the July 2007, you have to go back all the way to September 2000 to witness another Sell Signal, and that signal was followed by a 46% correction. Given the extraordinary track record of this computer trading program going back more than 20 years, if a monthly chart sell signal is triggered next week, it should definitely be respected. In the interest of full disclosure, I am short the S&P 500 Index using the ProShares Double-short ETF (symbol SDS) and I am long selected Gold/Silver mining shares (AG, EXK, GG, and PPP) in client accounts under my management.

Dow Jones Transportation Average with Computer-generated Buy & Sell Signals

New York Composite Weekly Bar Chart with Computer-generated Buy & Sell Signals