Deutsche Bank is out with a piece of research this weekend mentioning the fact that the S&P 500 has just broken a record high thanks to a median trailing PE ratio of over 18 - the highest we've seen since 2010. They note that this PE ratio is 12% above the long-term average going back to 1960. The forward PE of 17.3 times earnings expectations over the coming four quarters is 22% above the historical median. David Bianco attributes this, as almost all of us do, to the incredibly low yields on bonds and their effect on the equity risk premium. More interestingly, Bianco includes an acknowledgement that it has now been 916 days since the last 10% correction for the index, or 3.6 years (last October's Ebola /ISIS sell-off was 9-and-change percent intra-day). We've not had even a 5% correction so far in 2015 despite a spate of elevated volatility earlier in the year.
$20 Billion in withdrawals from equity funds last month was the most since December of 2012. Both the Dow and the S&P hit new records this week, although they have traded in a narrow range and volumes have been subdued. Friday's dip left the Dow in the red. For the week, the Dow ended 0.2 percent lower and the S&P rose 0.20 percent. The Nasdaq added 0.8 percent for the week. Volume on U.S. stock markets has been below the month-to-date average for several sessions. On Friday, ahead of the Memorial Day long weekend, about 4.9 billion shares changed hands on U.S. exchanges, below the 6.2 billion average this month, according to BATS Global Markets.
A tool to help confirm the overall market trend is the Bullish Percent Index (BPI). The Bullish Index is a popular market "breadth" indicator used to gauge the internal strength/weakness of the market. It is the number of stocks in an index (or sector) that have point & figure buy signals relative to the total number of stocks that comprise the index (or sector). So essentially it is the percentage of stocks that have buy signals. Like many of the market internal indicators, it is used both to confirm a move in the market and as a non-confirmation and therefore divergence indication. If the market is strong and moving up, the BPI should also be moving higher as more and more stocks are purchased.
The S&P 500 Index continues to hit nominal new all-time highs. But as evidenced in the updated chart below, most of the major equity indexes have settled into tight trading ranges with relatively low volume. Don't expect the S&P 500 index to break higher into a new bullish leg until BPSPX starts trending higher.
As confirmed in the chart below, the falling Dollar is boosting large-caps and they are outperforming small-caps. This makes sense because large-caps are typically multinational companies that derive a good portion of their revenue abroad. The Financial Times estimates that companies in the S&P 500 generate around 40% of their revenues abroad. These foreign earnings must be converted to Dollars and a strong Dollar translates into lower earnings. A weaker Dollar, on the other hand, helps the bottom line for companies that generate revenues abroad.
It's hard to imagine the Dow Jones Industrial Average climbing strongly without some help from the transports. The chart below shows a weak picture for the Dow Transports, which is also below its 200-day moving average.
The dollar rose to a 3-1/2-week high against the euro and U.S. bond yields rose after the stronger-than-expected rise in core consumer prices. Gold climbed to a three-month high and silver rallied for a fifth day on speculation that weaker economic prospects in the US mean the Federal Reserve may delay increasing interest rates.
Market Outlook
Investors have enjoyed an extended period of low volatility and steady gains, but with the Fed on track to raise rates this year and major indexes near records, the market could get a bit choppier in coming weeks. "I think what Janet Yellen and all of the Fed officials have been doing is very carefully choreographing their move. I think this is probably the most telegraphed Fed liftoff in some time," said Bruce Zaro, chief technical strategist at Bolton Global Asset Management, "they're concerned about the markets' reaction."
The Stock Trader's Almanac discusses how the days after Memorial Day have been rather bullish. In the table below they go back to 1971, the year the Uniform Monday Holiday Act took effect, moving Memorial Day and most other federal holidays to Monday. Improved performance since 1986 is also highlighted. In what used to be the "May/June Disaster area" the S&P was down 15 of 20 Mays from 1965 to 1984. Then May was the best month from 1985 to 1997. Some of this bullishness after Memorial Day can be attributed to the strength of the first two days of June (not the case this year). In recent years, the Friday before Memorial has become getaway day on The Street and volume is often diminished and trading uninspired. NASDAQ exhibits a similar pattern to S&P 500 over the same time periods.
Recently we reported "...The weaker dollar helped U.S. crude oil prices hit fresh 2015 highs by making oil less expensive for holders of other currencies..." The weak dollar also furthered large Nasdaq and S&P 500 companies who convert overseas revenue back into dollars.
A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend.
Last week we said "...we note how new bullish momentum is developing. The Momentum Factor needs to break through the top of the current trading range to confirm a bullish move..." In the updated chart we can see the recent bullish move is not confirmed as the top of the trading range contains the price. Also noted is momentum has turned flat.
Sell in May and Walk Away' is turning into one of the best months of the year, but a lot of traders are sitting on the sidelines? The holiday tendency, and the long-term chart patterns are lining up. Add to that the thin volume. Plain and simple, the S&P 500 index is still trying to go up, and "clearly" the historically low volume and the 3-day weekend is only adding to it. The low volume we are seeing now is probably going to continue as summer kicks into gear. The VIX dropped down to 12.13 (-5.98%) only adding to the sluggish, low volume grind.
The Put/Call ratio indicates traders remain moderately bullish about the near term market direction as they use calls to bet on higher stock prices.
The American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. The current survey result is for the week ending 5/21/2015. The current AAII neutral reading is at a historically high level. Retail investors are nervous about initiating new long positions, but they are not selling current positions either. Small investors appear to be following the lead of institutional money managers and sitting on relatively large cash positions.
The National Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by NAAIM members. The blue line depicts a two-week moving average of the NAAIM managers' responses. NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays. Responses can vary widely as indicated below. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group. As the name indicates, the NAAIM Exposure Index provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. First-quarter NAAIM exposure index averaged 83.02%. Last week the NAAIM exposure index was 60.38%, and the current week's exposure is 67.61%. The current low exposure number confirms relatively subdued trading volume.
Trading Strategy
In a thin volume-trading environment it's safest to keep your own trading light, since even in a slow grind you can get some unpredictable moves. You don't want to get caught on the wrong side. Knowing when not to trade is as important as knowing when to trade. In the chart below you can see how Technology, Materials and Financial stocks led the way the past month. These are large capitalization sectors that are benefiting from the weakened dollar. If you believe the dollar will remain subdued, bidding on strong stocks in these sectors is the way to go.
Feel free to contact me with questions,
