Market Indicators & Strategy Report Mar. 30, 2015




MMI Stays Anchored in Bullish Territory

Our Major Market Indicators remain in bullish territory, which is where they have stood since February 8th of this year. This past week all the major indexes retreated. The S&P 500 fell to 2061.02, down 2.2% for the week.  The Dow Jones Industrials were down 2.3% and the NASDAQ retreated 2.7%. The Russell 2000 small cap index ended the week at 1240.41, down 2.1%. This week the MMI rose to 66.17 from the prior week’s 65.17, continuing the trend of bullish readings. Below, the weekly graph of our Major Market Indicators shows the trend since last May.



The market sentiment indicators improved from the prior week, but still score as bearish. The Put-Call ratio on the CBOE ended the week at 66/100, which registers as bullish. The Arms Index (TRIN) was 1.69, also a bullish score. The TIM Group Market Sentiment indicator moved into the bullish range at 47.7%, vs. the prior week when it was not bullish. Finally, the short ratio on both the NYSE and the NASDAQ were bullish, at 4.70 and 4.48 days to cover respectively. All these factors were positive contributions to the score of sentiment indicators for this week.

The remainder of our sentiment indicators remains in bearish territory.

The Volatility indicators (VIX and VXN) rose by week’s end, but are still below the level needed for bullishness, standing at 15.07 and 16.89 respectively. We score VIX/VXN at greater than 20 as bullish. The chart below shows the high-low range for the VIX for the past 25 years, along with the average VIX for the year.


Source: Standard and Poors Corporation

The ARMS index on the NASDAQ (0.78) is still too low to indicate an oversold position. The same holds true for the S&P 100 put/call ratio, which was 95/100 (over 125/100 is bullish in our book). The confidence index, the index of high-grade bonds yield vs. intermediate grade bonds yield (3.38%/4.42%) produces a ratio of 76.5%, indicative of too narrow a quality spread. Finally, the Consensus Index and the Market Vane Index are both running too optimistically, a further bearish sign.

Overall, only five-twelfths of our market sentiment score weight is in the bullish range, so by definition we are calling sentiment bearish in the aggregate. Please note we score sentiment indicators from a contrarian point of view.




Our technical indicators fell this week, from 12 out of 15 indicators bullish, to 9 out of 15 this week. The ratio of new highs to new lows rose to 3.10 times this week, clearly bullish. The remainder of our bullish scoring came from the indexes we score trading above their 200 day moving average. All the indexes we track sat above their 200 day average at week’s end: The S&P 500, DJIA, NASDAQ Composite, the NYSE Composite, the Russell 1000 equal weight ETF (EWRI) and the Russell 2000 equal weight ETF (EWRS) are all above their respective 200 day moving average.

On the bearish side of the ledger, the advance/decline volume ratios on the NYSE and the NASDAQ are both out of the bullish range, at 0.69 and 0.68, respectively. We also tracked bearish readings from the advance/decline ratio of the number of stock issues traded, and in the week the NYSE ratio fell to 0.60 (1212 issues advanced, 2014 declined), and on the NASDAQ the ratio fell to 0.54 (999 issues advanced and 1865 declined). We score the 10 day moving average of up volume vs. down volume in the NYSE, and this stood at a 1.28 ratio, while the same indicator for the NASDAQ was a 1.33 ratio.  All these advance/decline indicators represent bearish readings. To sum up the technical picture, the weight for the positives outweighed the negatives, so technical indicators are bullish.


Our liquidity indicators are bullish. Money market funds balances are over 10.9% of the market cap of equities, which provides buying power to support stock prices, a bullish score. On the other hand, customer credit balances at brokerages stood at only 33% of margin debt at last reading (January), a low level and a bearish score. In a sharp sell-off, customers either have to post more cash to bring their margin account above the minimum maintenance threshold, or margined stocks will be sold to meet the cash call. This low cash level implies increased risk of customers having to meet margin calls with stock sales rather than posting more cash.

Tipping the balance to the positive was our cumulative market liquidity calculation for the trailing four weeks. Total flows into the market as calculated are registering a bullish inflow. We’ve had four straight weeks of positive mutual fund inflows, at $23.6 billion. Only a little over $1 billion of this flowed into so-called “retail” mutual funds, while the remainder came into equity ETFs. The corporate acquisition market contributed $32.3 billion of cash flow in the trailing four weeks. We count only the cash component of M&A deals as announced. The big contributors these last four weeks were the Heinz merger with Kraft Foods, $9.7 billion, and AbbVie (ABBV) buying Pharmacyclics (PCYC), $11.9 billion.  Announced stock buybacks have been huge these last four weeks: $70.25 billion total buyback authorizations announced. The major announcements these last four weeks come from Qualcomm at $12.9 billion and Merck at $10 billion. We counted almost 70 different buyback announcements in the period.

IPO activity was muted theses recent weeks, with only $5.6 billion of new market capitalization added to the market for the trailing four weeks.

The chart below shows the number of IPO pricings over the last decade. We reached a ten-year high in 2014, but the first quarter of 2015 is down vs. last year:  just 33 IPO pricings vs. 64.


Secondary stocks offerings have been numerous lately, with $15.7 billion raised in the trailing four weeks.  Insider selling pulled $5.6 billion of cash out of investor hands in the past four weeks.

We calculate cash inflows to domestically focused equity hedge funds at a negative outflow of approximately $0.5 billion in February. Given the relative secrecy of hedge funds this calculation will always be a rough approximation, but we are applying our methodology on a consistent basis, month-to-month. By that calculation, domestically focused equity hedge funds saw a small net outflow in each of the past three months.

Overall, we count up a positive net inflow of liquidity into the domestic market of approximately $99.3 billion for the past four weeks, which is more than sufficient to warrant a bullish score. Combined with the other factors above we arrive at a bullish view on liquidity.


Our valuation indicators improved this week to score bullish, vs. a neutral level last week. We estimate the total domestic market capitalization is trading at 98.4% of replacement cost of the asset base of non-farm, non-financial corporate businesses. By this metric, our version of Tobin’s q, stocks are slightly cheap. This is down from over 100% last week, and accounts for the increase in our score for the week, which in turn moved us into the bullish range on valuation.

Our fair value target for the S&P 500 is 2652, representing a 28.7% upside from the close on March 27th. The target uses a 22.6x multiple applied to 2014’s estimated operating earnings of 117.22. Our fair value target multiple is arrived at using an intermediate grade bond yield rather than the ten year Treasury bond, due to the artificiality created by Quantitative Easing. The S&P 500 is trading at 17.7 times the trailing four quarters operating earnings. This is above an historical norm of 15.5 times operating earnings. The S&P 500 is now trading at 17.6x 2014E and 17.2x 2015E.

The upside to the fair value target is sufficient to rate bullish.  So too is the ratio of the S&P’s earnings yield vs. the Single-A 10-year bond yield.

Those bullish factors are offset by some bearish indicators.  Compared to GDP the market is at a 39.7% premium.  Small cap stocks, as judged by comparing the T Rowe Price New Horizons Fund to the S&P 500 are not cheap, at a 1.91 times ratio. However, they look a lot cheaper if we substitute the P/E of the Russell 2000 – 1.27x, or the equal-weighted Russell 2000 ETF – 1.04x.

We acknowledge there is no shortage of pundits declaring “the market is expensive”.  Our methodology is clearly different. The bond yield used above to drive the valuation target allows for a higher theoretical target for the S&P 500. However, our scoring of valuation is reduced as the market approaches this target. Overall, valuations are bullish, with bullish indicators slightly greater than bearish indicators.


The MMI score for earnings momentum remained bullish this week. The earnings season for the fourth quarter positive to negative ratio of earnings surprises is 3.27x, a bullish score. Not surprisingly, reported earnings are coming in ahead of forecast.  Q4:2014 is currently estimated at a positive growth rate of 3.7%, vs. 3.7% at February 28th, and vs. the +1.7% estimate carried as recently as December 31st.  Earnings momentum on a forward basis is not as strong. Earnings expectations for Q1:2105 as well as the full years 2014 and 2015 continues to decline. Q1:2015 estimates have been lowered to a negative growth rate of (4.6%) vs. (4.6%) at 2/28/15.  2015E earnings are now projected by the street at a positive growth rate of 2.5% vs. 2.8% at the end of February.

2015 estimates have come down to an estimate of 2.5% growth rate vs. 2.8% at 2/28/15. Importantly, the views on 2015 are skewed by market sector.  Presently, the energy sector is forecast to see a drop in earnings of (55.5%) while the remaining sectors are all positive. Three sectors are even forecasting double-digit growth: Financials, Consumer Discretionary (won’t we all spend those gasoline savings?) and Health Care. See below. The early reading on 2016 earnings show S&P 500 growth at 12.4%, with energy the best performer, slated to show 44.1% earnings growth, off a rebound of 13.7% in revenue. Clearly analysts are looking for a bounce back in oil prices.

On a PEG ratio (P/E to growth rate) basis S&P earnings still look relatively cheap, at a PEG of only 1.93 times. Looking at small cap stocks, the Russell 200 trailing P/E ex: negative earnings were 22.52x at 2/28/15, vs. a five year eps growth rate of 13.75%, implying a PEG of 1.64 times.

Notice we compare earnings growth in terms of its change to a recent anchor – February month end in this case. We’re looking at recent changes in earnings expectations because we infer the market is taking cues off of the latest directional change. Thus, overall earnings momentum now scores bullish.



The Federal Reserve has ended its balance sheet expansion (for now). Current policy is to hold the overnight Fed funds rate down at zero to 25 basis points, and lately has hovered around 11 basis points. We believe the most recent FOMC announcement take us an incremental step closer to the first rate increase since the financial crisis ended. But as indicated in the statement text, the money authorities are “data dependent”.

Our excess liquidity indicator is bullish at 323 basis points.  This is evidence the Fed is still in easy money mode, providing more than three percent more liquidity than the current nominal GDP growth rate. This figure takes into account the decreased velocity of money in recent periods.  We arrive at this figure by subtracting the annual percent change in velocity from the year over year percent change in M2 money supply. Then we subtract the most recent quarter’s percentage change in nominal GDP. We note that the third estimate for Q4:2014 GDP came out this past week and it showed an increase in fourth quarter real GDP of 2.2% on an annualized rate.

The Treasury yield curve is accommodative to growth. The spread between the ten –year and one-year rates is about 1.47%, a positively sloped yield curve. However this has been compressing in recent weeks and bears watching.

Junk bonds are pricing at relatively tight yields vs. historical patterns. Using the HYG fund as a proxy, the yield-to-maturity of that fund stood at 5.62% this week vs. 5.69% last week. The spread vs. 10 year Treasuries stands at 3.65%, and this is not bullish.

Most market participants agree the rally we’ve enjoyed since March 2009 has been fueled in no small part by the accommodation of the Federal Reserve. Bearish investors are anticipating the Fed “taking away the punchbowl” in the near term. Offsetting that sentiment, we offer the below chart of the breakeven spread between 10 year T-bonds and 10 year Treasury TIPS, which stood at 180 basis points on March 26th. This is close to the bottom this spread has posted in recent years, and well below the 2.18% historical average, as well as below the Fed’s 2% inflation target. This chart’s decline over the last six months represents the market’s expectation of decreased inflation, which would seem to work in favor of keeping the Fed Funds target at its current near-zero level. However, it has moved off its bottom. Is it heading back up to prior levels?



In summary, our MMI score has stayed in bullish territory the past eight weeks, and was 66.17 this past week.  All the major component sections of market indicators scored bullish, except for market sentiment.

Greg Eisen
Singular Research Analyst and Market Strategist