Market Indicators & Strategy Report Sep. 16, 2014





MMI on the Borderline of Bullish

Our Major market Indicators fell in the week ended September 12th. The MMI indicators fell to 59.83 from 62.50 last week, just barely below the bullish range.


The decrease from the prior week is solely due to a deterioration of some technical indicators as explained below.  Overall we consider the score sufficient to maintain our bullish stance. Below is our commentary on the status of the different categories of Major Market Indicators.



The Put/Call ratio on the CBOE fell to 60/100 vs. 64/100 last week, so this indicator fell below the bullish range this week. On the flip side, the TIM Group sentiment indicator moved into the bullish range. This week’s TIM was 48.40 vs. 50 last week, so it’s in the bullish range. The two changes offset each other, so our net score for market sentiment is unchanged. We note that is flip-flop is the exact opposite of the flip-flop of the prior week. So not much new here.



Technical indicators remain bullish, but the score fell for the second consecutive week, accounting for all the change in our total MMI score.

The ratio of new highs to new lows was reduced to 1.53, a positive value but not enough to score as bullish on our scoreboard. Also, the ratio of 10 Day moving average of up volume vs. down volume for stocks on the

NASDAQ fell to 1.14 vs. 1.57 last week, a bit below our standard for bullishness.  Still, technical indicators scored eight out of total possible score of 15 bullish indicators, enough for the total category to remain bullish.



Our total score on liquidity indicators remained unchanged. Mutual funds saw a positive $0.98 B inflow this week, for a 4 week total of a positive $21.5 B (vs. $4.5 B 4 week total last week). The key to this increase is that we track the trailing four week total flows: we dropped off a bad week out outflows, so the score improved despite the paucity of the current week’s inflows. Trailing 4 week new cash takeover announcements improved to $27.6B vs. $22.6B last week. There were no really large deals of note. Buyback announcements were up this week to $5.9 B.  The four week total stood at $13.3 B. The biggest buyback announcements came from Abbot and Tyco. Total liquidity ended up a positive $55 B vs. $35.6 B last week. This is despite a large week for insider selling. Net insider sales were a negative ($3.3) B drag on liquidity. We note that there were no IPOs and only a couple of smaller secondary stock offerings priced this week. We are still expecting a ramp up in both IPOs and Secondary offerings as the weeks progress. There is a full pipeline of deals slated to get placed before the end of the year.



Major valuation indicators remain on the bearish side, though our total score is unchanged for the week. None of our indicators changed for the week. The S&P 500 closed the week ended on 9/12/14 at 1985.54, down 1.1% from 2007.71. This is 17.49X the TTM EPS. We set a fair value P/E for the index at 18.45X. Thus a target for the SPX using the fair P/E = 2209.04, representing an upside of 11.3%. The trailing P/E of the bellwether small cap mutual fund (PRNHX) is 1.62 X the Trailing S&P on a relative basis, not quite a bullish indicator at this time. We calculate the total market cap of the domestic market to replacement cost ratio = 102.7%, while market cap to GDP at 141.4%.     We’ll get an updated report on replacement cost from Washington next week on September 18th.




Our MMI scoring for earnings momentum did not change for this week.  The earnings factors remain bullish, with the second calendar quarter of 2014 now in the books. Briefly, we’ve seen strong results for Q2:14. The surprise ratio for the quarter (positive vs. negative) was 3.09 X. Earnings estimates for Q3:14 estimate +6.2% earnings growth, though this is down from the +8.9% consensus estimate back on 6/30/14. However the full year 2014E holds a +7.3% estimated growth rate of S&P earnings. The S&P 500 is now trading at 16.6X 2014E and 14.9X 2015E. On a PEG ratio basis the trailing P/E vs. the trailing TTM EPS growth rate is down to 2.19x, which is cheap vs. historical patterns.



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 +4.30% while the change in nominal GDP = 1.57%, so the excess of M2 over GDP stood at 2.74%.



In summary, our MMI score is just below the bullish zone, at 59.83.  The bullish components in the MMI are the technical, liquidity, earnings momentum, and monetary policy categories. In contrast, the valuation and investor sentiment categories tell a bearish story. Since we’ve been in the bullish zone in recent weeks, we’ll maintain a bullish posture, as we haven’t ventured down to bearish ranges yet on the MMI.


Greg Eisen
Singular Research Analyst and Market Strategist


Market Indicators and Strategy Report 20140916 (PDF)