The MMI Are Neutral As Prior Bearish Readings Did Not Sustain
Our weekly calculation of the Major Market Indicators scores neutral this week. This is the second week in a row with a neutral score following five weeks when the Major Market Indicators index had scored in the bearish range for four out of the five weeks. This week, the MMI ended at 58.17 as shown in the chart above, and the graph below. We require a score of at least 60.00 to warrant a bullish rating, while any score below 50.00 is bearish.
It’s important to acknowledge that the MMI score would have been bullish if not for the liquidity calculation coming in at a bearish reading. This in turn was the result of one big negative cash flow: we reversed a prior positive liquidity input when early in the week a judge ruled against the proposed takeover of Humana (NYSE-HUM) by Aetna (NYSE-AET). We had previously added a positive $19.0 billion to liquidity when the deal was announced. We’ve decided to reverse that figure since we believe the deal is no longer viable. By the way, this court decision does not bode well for another health care merger: Anthem is buying Cigna, and we scored this as a $27.0 billion positive liquidity event. That deal may also have to get reversed. Does anyone remember the UAL mini-crash of October 13, 1989? That was only about a $6.75 billion deal.
Many observers have remarked that valuations are too high and the market cannot make further progress in light of the lack of earnings growth. While earnings estimates call for 2016 to be flat vs. 2015 for the S&P 500, forward estimates for 2017 are projecting low double digit growth. Naturally, most analysts will point out that earnings estimates start high and fade over the course of time, but could 2017 (and 2018 for that matter) be different? We should not be surprised if the new administration gives us a combination of tax cuts, spending stimulus and regulatory relief which combined might add significantly to earnings growth. If earnings growth in 2017 rose instead by say 20% then the S&P 500 would be valued at approximately 16x forward earnings, which while greater than the historical median doesn’t look half bad! The offset to this is any negative consequences of protectionist measures enacted.
In December 2015 the Federal Reserve raised rates a quarter point, and the market sold off as warned by the MMI (see the late 2015/early 2016 drop in the graph below), and this past December the Fed gave us another quarter point increase. However, unlike the prior year we didn’t see a large sell-off this time around. The MMI did not maintain a bearish reading, which to us indicates the rate increase has passed and is not impacting the market significantly.
The S&P 500 has experienced a series of peaks and valleys since early last year. The index reached an all-time peak just this past Thursday, and is up 10.4% from the prior trough (2083.79) to last Thursday’s close (2300.99). As we’ve pointed out before, there have been tradeable rallies and pullbacks over the past couple years, but for a buy-and-hold investor the S&P 500 is up 26.4% since the October of 2014 bottom.
The stock ETFs associated with the major stock indexes are very close to their all-time highs, and are below them as follows: S&P 500 (SPY) is (0.32%), the Dow Jones Industrial Average (DIA) is (0.17%), the NASDAQ (QQQ) is (0.10%) and the outlier, the small cap Russell 2000 (IWM) is a bit worse at (1.89%) below its prior peak prices. The chart below shows the performance of the major indexes since their highs, as well as year-to-date.
For the calendar year-to-date, the market is off to a good start as shown above. There’s an old say “as goes January, so goes the year”. We hope that holds true!
Below, the weekly graph of our Major Market Indicators shows the trend since May of 2014 through January 27, 2017 (this past Friday).
The market indexes have gained considerable ground since the election, as optimism for growth has taken hold. Offsetting this is concern valuations have gotten stretched, and that the Federal Reserve will follow through on its intention for more rate hikes this year. These countervailing forces will continue to weigh on investors’ psyche, since these are the basics for stock pricing. Added to that is concern over the unknown future behavior from a new administration in Washington. Investors will react emotionally to events as they unfold, and that’s where the MMI analysis comes in. The MMI index is an approach designed to take some of the emotion out of the process and take the measure of what the markets are telling us. Right now the markets are telling us the backdrop to investing is neutral – neither bullish nor bearish. While many investors are nervous in that the market has made so much progress since the election, the MMI index is not telling us run scared, or run with the bulls.
The MMI is a collection of at least 46 different indicators (some have sub-indicators) covering the categories shown in the chart above, which try to “take the temperature” of conditions for equity investors. Frequently investing pundits try to point to a single statistic as justification for bullishness or bearishness. The MMI is designed to take a broad reading of the data to achieve a more measured response. We’ve been publishing our results since May of 2014.
Please read one of our prior full reports for the details on our methodology of how we arrive at our MMI index calculation.
Greg Eisen, CFA
Singular Research Analyst and Market Strategist
December 31, 2016