Inside The Stock Market ...trends, cross-currents, and outlook
A Stock Market Brain Teaser
The bull and bear labels can be dangerous to stock market operators, so much so that famed speculator Jesse Livermore is said to have abandoned them in favor of softer terminology: “Lines of least resistance.” We aren’t about to ditch the old labels, or even our collection of bull and bear bookends.
Revenge Of The Nerds?
Last month we detailed two technical shortcomings of the rally off the March 23rd market low. The stock market duly noted our critique and has issued its response.
“Not Quite” Super
The average “super-overbought” MBI reading occurred 54 days after a market low; June 4th marks the 51st trading day since the March 23rd low. Thus, any signal in the days ahead would arrive essentially “on time,” but the slippage (the S&P 500 gain already realized) would be enormous at around 40%!
“Normalizing” For The Earnings Collapse
Stocks (and more specifically, U.S. blue chips) did not fully (nor even approximately) discount the economic calamity. The result is that, in just over two months, the “baby bull”—if that’s what it is—has achieved what took his legendary predecessor more than eight years to accomplish: Top 25x on our Normalized P/E.
“Peaking” Into The Future
Peak P/E has just moved into its top decile on a postwar basis. If the recent rally is indeed the first roar of a new bull, then this is a bull that’s a “baby” on a calendar basis, but quite elderly from a “character” perspective.
The Wrong Kind Of “Head Start”
The rally’s initial resemblance to the first up-leg off the secular 2009 market bottom is remarkable. Both rallies started in March, and achieved gains of almost 40% within 50 trading days. Both, of course, sprung from a backdrop of unprecedented monetary stimulus.
A Bear That Left VLT Unscathed?
Our VLT Momentum algorithm was driven into oversold territory for at least a few months in all prior postwar bears. It didn’t happen yet this spring, which implies that the “grieving process” was neither deep enough nor long-lasting enough to set the stage for anything like a repeat of last decade’s bull. Most of our valuation work says exactly the same thing.
A Long Boom, And The Ultimate Bust
Last December, we marveled at the disconnect between the (surging) S&P 500 and the (sagging) Boom/Bust Indicator. Just six months later, we can only scratch our heads at what the hell we were complaining about.
Sentimental Musings
Long-term sentiment indicators have carved out a four-month pattern similar to what we’ve observed in Large Cap valuation measures. That’s no surprise; valuation is a sentiment measure.
The Money Supply Isn’t Magic
Imagine our surprise when the bullish stock market narrative is suddenly all about money. Cynically, though, that might be because money supply and the unemployment rate are the only economic data series staging upside breakouts, and the latter doesn’t lend itself to a good narrative.
Money Losers Among Small-Cap Growth
Late last year, we presented data showing that profitability has become more elusive for small companies despite a record-long period of economic expansion. We discussed the potential causes underlying this phenomenon.
There’s More To It Than That
It’s a down year for stocks, yet John Bogle must still be chuckling. A full-employment economy that had propped up one of the two most overvalued stock markets in U.S. history just suffered a cataclysmic “sudden stop.” Yet Bogle’s buy-and-hold disciplines have so far dodged the bear.
Betting Against The Odds?
The optimists are betting that the longest bull market in history—one that carried valuations above levels seen at all but one of preceding cyclical peaks—has been followed by the shortest bear in history, at 27 days.
Where Are The Leaders We Need?
Small Caps lagged during the bounce off the March lows before a late-April spurt briefly pulled them ahead of the S&P 500. Still, considering that Russell 2000 losses were so much steeper than the S&P 500’s (-43% versus -33%), we would have expected something better.
Not The Leader We Wanted??
If many of the typical leaders of a new bull market aren’t leading, what is? Technology, obviously—and the bigger, the better.
A Bounce Without “Oomph”
One would think that one of the most explosive market rallies of all time would trip-off all the traditional “breadth thrust” signals, or maybe even invent a few of its own. Sorry, no luck.
Calculate The Next Low... With The Last Peak?
How does one value a stock market in which 12-month forward EPS estimates show their widest dispersion in history? A good start might be with methods we use when forward estimates show practically no dispersion (like three months ago). In either case, we place little weight on such estimates; each revision usually has only marginal impact on our 5-Year Normalized EPS.
Median Valuations: Down, But Not Cheap
If we assume that valuations will “bottom” at the “richest” levels ever seen at a bear market low, there’s still 32% downside remaining in the median S&P 500 stock.
A Bear Market In Price, But Not Time?
Valuations aside, the absence of any sustained market pain over the last ten years argues for challenging times for stocks in the new decade.
Is “NASDAQ Fever” Peaking?
Even casual market observers have begun to marvel at the NASDAQ’s ability to defy the rest of the stock market, and the “U.S. Exceptionalism Index” continues to go parabolic.
The NOPE Index Says “Nope!”
The most valuable gauge we construct from the ISM Manufacturing and ISM Non-Manufacturing reports sunk into bear territory with the April update, signifying a serious margin squeeze has hit the service sector.
Utilities Sector: What’s Driving YTD Performance?
We review the somewhat out-of-character performance of the Utilities sector to try to pinpoint what is influencing results. This article touches on several potential drivers for the sector’s relative strength.
The Bull Is Dead, But The Leaders Live On
The bull market of 2009-2020 is no longer. But its spirit—its leadership—has somehow lingered, right through the worst of the decline and during the eleven-day, +19% S&P 500 bounce that followed.
NASDAQ Goes “Parabolic?”
From now ’til eternity, bullish market pundits will always be able to argue that the global spread of the coronavirus “caused” the current global recession and bear market. While the pandemic was certainly the final catalyst, these pages had been detailing the emerging cracks for over a year.
Did The 20% Bounce Kill The Bear?
We rolled our eyes when Barron’s and others proclaimed a “new bull market” after a three-day, 21% surge off the March low. That incredible bounce is much more likely to be the first of at least a few bear market rallies.
Looking To Credit For Clues
One of the first cautionary signals to emerge during the market’s two-year topping process was the failure of spreads on low grade corporate bonds to return to their early-2018 cycle “tights,” despite last year’s surge to new stock market highs.
Confidence Is The Key
The bull case for a “brief” pandemic-related recession and powerful recovery is the same as the bull case from two months ago for “no recession or bear market” at all: stimulus (as if that’s exactly what the U.S. economy has lacked for the last 11 years).
A Bear Market In Price, But Not Time
We have a hard time accepting that the excesses associated with an eleven-year bull market and expansion can be fully expunged in 27 trading days, no matter how ugly those days were… keep some powder dry!
How To Tell When Sellers Are “Exhausted”
NASDAQ was the superstar of the bull market yet, ironically, it was a NASDAQ breadth measure that periodically signaled that all was not well beneath the market’s surface.
Small Cap Smack-Down
We were fooled on Small Caps, and it’s been a “multi-factor” catastrophe.
Are SMIDs Cheap Enough?
A composite measure of Mid Caps and Small Caps are at bottom-decile valuations relative to their 26-year histories. From a shorter-term viewpoint, though, we find it scary that valuations are so low just a single month into the recession.
Are Foreign Stocks Cheap Enough?
For those who must remain fully invested, an interesting (if not sickening) feature of the bear market is that those who entered it loaded with the most expensive and “trendiest” stocks and sectors have lost the least.
Are You “De-Worsified?”
In recent weeks, we’ve seen the “sell-side” investment community get about as cautious as it ever gets, recommending investors to “trim risky holdings on ‘up’ days” and “stay diversified.” However, these cheerleaders’ idea of diversification is usually to hold more equities in different sizes and styles.
Is Passive Ownership Exacerbating The Sell-Off?
With the enormous popularity of ETFs, we’ve wondered if the high level of passive fund ownership could lead to stock price deviation from company fundamentals, and thus create greater price volatility.
Time To Revisit “Why We Normalize Earnings”
With an economic calamity and the Easter season upon us, we thought this would be a great time to resurrect our “Why We Normalize Earnings” vignette. Long time readers will recognize this as a staple from Green Books’ past.
Milestones, Mayhem, and Miley
If it can recover from its February setbacks, the bull market will turn 11-years-old some time in March, and our Golden Retriever will turn 13 at the end of the month.
Back Breaker?
With the wavering state of consumer and business confidence, even a modest stock market correction of 8-10% might deliver the fatal blow to confidence—and therefore to the U.S. economic expansion.
Out Of The Blue?
There have been long-time divergences between blue chips and other market segments signaling that all is not “in gear” beneath the surface—but this cautionary activity never foretells the “timing.” Recently, Small Caps, the Value Line Arithmetic Composite, and Dow Transports staged pathetic bounces off the January 31st “Coronavirus 1.0” low, while the blue chips had strong momentum into mid-February. Normally, such divergences typically last for at least 3-4 months before they become meaningful.
Valuation “Reset?”
The massive performance dispersion of the past two years makes it difficult (if not hazardous) to draw a simple conclusion about U.S. stock market valuations. But it’s safe to say that cap-weighted indexes like the S&P 500 and S&P Industrial Index remained significantly overvalued at the low point of the February correction.
A Developing Opportunity In The “SMIDs?”
The underperformance of Mid and Small Caps in the last few years has taken valuations from top-decile readings (and, indeed, a few all-time records) just 25 months ago, down to the middle—and even lower reaches—of their 30-year valuation boundaries.