Stocks Mixed into Final on a Healthy Consolidation of Recent Gains

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is neutral as the advance/decline line is about even, sector performance is mixed and volume is below average. The S&P 500 is up 14.2% this year, however the P/E on the S&P 500 has barely moved off its recent lows seen during the mid-year sell-off. The forward P/E is now 15.9 vs. a long-term average P/E of around 22. This is a result of the fact that earnings continue to exceed even the most optimistic estimates. During the correction, many said 3Q earnings growth would plunge to single digits before turning negative in 4Q as the U.S. entered recession. Instead 3Q earnings growth actually accelerated to around 20%. Another double-digit gain in likely this quarter and the possibilities of an imminent recession look remote. As it becomes apparent that a moderate growth and inflation environment is sustainable, I suspect the forward P/E on the S&P 500 will see 19.0 before we finally head into a cyclical bear. I still believe U.S. stock P/E multiple expansion is in its very early stages. Google (GOOG) is surpassing $500 today. I continue to believe its multiple will eventually expand to much higher levels than most expect. Yesterday, Jordan Kahn, a colleague of mine on TheStreet.com’s Street Insight, touched on the fact that global portfolio managers are underexposed to the U.S. I agree and believe Google will be a prime beneficiary of increased exposure to U.S. equities. Google remains my largest long position. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, investor performance anxiety and buyout speculation.