Market Indicators & Strategy Report Oct. 5, 2014





MMI Remains in Bearish Territory for the Third Week in a Row

Our Major market Indicators scored bearish in the week ended October 5th. The MMI indicators rose to 48.50 from 47.17 last week, but that is still a Bearish reading.



The increase from the prior week is due to marginal improvement in our technical and valuation indicators. Overall the total MMI score is still low enough to be clearly in the bearish camp, and we caution investors against new money commitments at this juncture. Below is our commentary on the status of the different categories of Major Market Indicators.


Our overall score for the market sentiment indicators remained unchanged for the week. The one noteworthy item we call out is the movement in the most discussed volatility indicator, the VIX and its cousin the VXN (CBOE volatility indexes for the S&P 500 and NASDAQ 100 respectively). After bottoming at 11.52 on 9/19/14, the VIX marched steadily upwards until this past Thursday when it peaked at a high of 17.98, from where it skidded down until Friday’s close at 14.55. The VXN displayed a similar arc. This was a very sharp reversal, consistent with the end of week rally.  Is this a sign of an improved market to come?



Technical indicators remained bearish, though improved from the prior week. Technical indicators scored seven out of a total possible score of 15

bullish indicators, vs. six the prior week. The ten-day moving average of up vs. down volume on the NASDAQ moved into bullish territory. Notably, the same indicator for the NYSE has not turned bullish.



Our liquidity indicators were unchanged for the week, and continued to score bearish. We had a very negative week of mutual fund flows.  Both traditional mutual funds and ETFs saw money flow out.  A total of $10.4 billion flowed out of funds in the week ended this past Wednesday. The corporate acquisition market improved, with a strong week of announced cash acquisitions, featuring Encana buying Althorn and Vista Equity buying Tibco Software.  Buyback announcements also continued to run strong, but IPOs were more than an offset for the positives.  This past week saw a litter of IPOs hit the market, and though none of them were anywhere as large as Alibaba, their combined effect was still pronounced.  The combined lingering effect of the large Alibaba IPO, and negative fund flows this week served to continue dragging on the liquidity indicators.



Major valuation indicators rose to a neutral level this week. The S&P 500 closed the week ended on 10/3/14 at 1967.90 vs. 1982.85, down (0.75%). The S&P was trading at 17.34X the TTM (Operating) EPS. We set a fair value P/E for the index at 18.42X, producing a target for the SPX using the fair P/E = 2194, representing an upside of 11.5%. We calculate the total market cap of the domestic market to replacement cost ratio = 99.10%, while market cap to GDP at 137%. The drop in market cap to replacement cost below 100% moved this indicator into the positive camp, and accounted for the increase in our valuation score.



Our MMI scoring for earnings momentum fell from bullish to neutral this week. We’re on the cusp on transitioning into third quarter reporting season. Earnings estimates for Q3:14 forecast +4.6% vs. +4.7% earnings growth last week, down from the +8.9% consensus estimate back on 6/30/14. Since June 30th the biggest earnings estimate cuts have been in Financials and Energy, and Health Care is the only section showing a rise in estimates. The full year 2014E holds a +6.8% estimated growth rate of S&P earnings, down from the prior 7.3%. This drop in the 2014E forecast caused the decrease in our scoring this week. The S&P 500 is now trading at 16.5x 2014E and 14.8x 2015E. On a PEG ratio basis the trailing P/E vs. the trailing TTM EPS growth rate is down to 2.18x, which we consider cheap.



Our MMI scoring for monetary policy did not change for the week. A key indicator we look at, so-called excess liquidity remains strong. The year over year change in M2 is +4.41% while the change in nominal GDP = 1.67%, so the excess of M2 over GDP stood at 2.74%.  Interest rates on high yield bonds, as measured by the HYG fund, moved up for the week, to 5.66% vs. 5.63% last week.  Very short term rates are still running very low, with three month treasuries effectively at zero interest. For now our monetary policy indicators remain bullish, though as we said previously, it looks like our central bank is gearing up to, if not taking away the punch bowl, at least not refilling it!



In summary, our MMI score, though improved from the prior week, remains in bearish territory, at 48.50, compared to 47.17 in the prior week. The only bullish component in the MMI is the monetary policy category. In contrast, the investor sentiment, technical, and liquidity categories send a bearish signal. Valuation and earnings momentum indicators are neutral. This is the third week in a row we sit with a bearish score, after running in the bullish zone in prior weeks. We study the MMI to answer the question: what is the market telling us?  It’s telling us to remain cautious.


Greg Eisen
Singular Research Analyst and Market Strategist