Bulls vs. Bugs
(As of press time markets have strongly rebounded with the S&P 500 +3.0%)
While the Corona virus has provided and an injection of exogenous risk, the market continues to grind higher. Our MMI reading has moderated but is still a bullish +56.7. Liquidity and EPS momentum are still negative. Market sentiment, technical indicators, valuations, and monetary policy are all providing positive readings. We maintain our price target for the S&P 500 at 4,000.
Is fear of missing out rising? Witness Tesla as a precursor.
TSLA 3x in 3 months
Market Sentiment: Positive
The Corona virus sell off pushed the VIX and VXN above 20, a volatility spike that is positive. The bull/bear ratio also turned positive as the bears outweighed the bulls. The ARMS index reading of 1.83 on the NYSE confirmed the oversold nature of the market. Similarly, the put to call ratio spiked to 0.74.
Technical Indicators: Positive
The NASDAQ led the way with an advancing/declining volume indicator of +1.79. To further support a strong technical stance, the weekly advance/decline breadth indicator had a reading of +1.94. All major market indices remain solidly above their 200-day moving averages.
S&P 500 (2/2019-2/2020)
Liquidity Indicators: Negative
The John Q Public investment conundrum continues as individual investors liquidate equity and rotate into bond funds. Over the last four weeks, $18 billion has come out of equity funds and $36 billion has flowed into bond funds. Our NYSE margin indicator is negative at 25% equity. Buybacks and M&A activities are still on a hiatus. While the equity issuance marketplace is starting to grow with over $11 billion slated to hit the market in February.
Valuation Indicators: Positive
Only the Equity to GDP ratio is negative at 1.57 (vs. 2.1 in the year 2000). We believe individual investors have yet to fully participate in this phase of the bull market and are likely to dial up their equity exposure as their bond portfolios lag without further rate cuts to boost returns. Our 4,000 S&P 500 target is predicated on continued multiple expansion, providing 20% upside and EPS growth in 2020 making up the difference at nearly 9%. The earnings yield is still attractive at 5.2% versus 3.7% provided by BBB corporate bonds. Contrast this result with the 2000 dot-com bubble where the earnings yield was 3.4% versus 8% on investment grade corporate bonds.
Earnings Momentum Indicators: Negative
S&P 500 earnings are expected to be down 1.3% for the fourth quarter of 2019. This has been revised upward from a (1.6)% forecast one month ago. Earnings surprises, so far, have come in at 65%, with 45% of the reports in, slightly below the historical average. However, forward estimates for the upcoming quarter and 2020 year-end estimates have been revised slightly lower. The current consensus forecast for the S&P 500 2020 earnings is $178.24. This result would represent an earnings increase of slightly under 10%.
Monetary Policy: Positive
M2 growth last 12 months +5.9%
The fear of the Corona virus has caused the yield curve to flatten. Also, the high yield spread to treasuries is negative at (348) basis points. However, the term spread comes in at 95 basis points and our excess liquidity indicator is +167 basis points. Forward rates hint at a possible rate cut in the next 6 months due likely to the Corona virus fears. These readings still put the Fed solidly in the bulls’ camp.
Asset Class Performance Summary
IVE (value) vs IVW (growth)--1000 bps positive spread to growth
Large cap growth continues to outperform large cap value by 550 basis points this year. Mexico is up 4.09%, followed by Gold up 3.88%. The two laggards are energy (12.36)% and China (7.94)%. 55% of stocks are above their 200-day moving average while 42% are above their 50-day moving average. This economic indicator index was flat last month.
We wish you a great start to the new year and hope for a quick recovery in the stock market.
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