Market Indicators & Strategy Report Sep. 28, 2014





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

Our Major market Indicators scored bearish in the week ended September 26th. The MMI indicators rose to 47.17 from 43.00 last week, but that is still a Bearish reading.



The increase from the prior week is due to marginal improvement in our market sentiment 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. Our liquidity indicators still need to digest the Alibaba IPO, and this past week we saw a number of significant new companies come public. Below is our commentary on the status of the different categories of Major Market Indicators.



The Put/Call ratio on the S&P 100 rose to 69/100 vs. 60/100 last week, so this indicator now scores bullish this week. Also, the TIM Group sentiment indicator moved back into the bullish range. The net result of these two changes is to raise the sentiment score. We note that these two indicators have been toggling back and forth in and out of the bullish range for a few weeks.



Technical indicators remained bearish. Technical indicators scored six out of a total possible score of 15 bullish indicators, unchanged from the prior week, so the total category to remains bearish.



Our liquidity indicators were unchanged for the week, and continued to score bearish. We had another positive week of mutual fund inflows, corporate acquisition and buyback announcements, but this is overshadowed by the continued overhang from the IPO market. The week before last absorbed the huge Alibaba deal, and this past week we saw continued flow of large companies coming to market, including: Group Aval (AVAL), Israel Chemicals (ICL), and Citizens Financial Group (CFG). It will take another couple of weeks to digest all this new stock.



Major valuation indicators remain on the bearish side, though our total score rose marginally for the week. The S&P 500 closed the week ended on 9/26/14 at 1982.85, down 1.4%. This is 17.5X 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 = 2203, representing an upside of 11.1%. This upside potential to our fair value target accounted for the increase this week in the MMI score for our valuation indicators. We calculate the total market cap of the domestic market to replacement cost ratio = 100.92%, while market cap to GDP at 139%. This past Friday the government released its third estimate for second quarter 2014 GDP, which was a slight up-tick from the prior estimate. Real GDP rose 4.6% year-over-year in the second quarter, and encouraging sign after the -2.1% decrease in the first quarter.



Our MMI scoring for earnings momentum did not change for this week.
We’re done with earnings reports for the second quarter, and the third quarter’s results should start rolling in shortly. Earnings estimates for Q3:14 estimate +4.7% earnings growth, down from the +8.9% consensus estimate back on 6/30/14, and well below the prior week’s +6.2%. 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. However the full year 2014E still 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 2.18x, 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 = 1.47%, so the excess of M2 over GDP stood at 2.74%. Interest rates on high yield bonds moved up for the week, to 5.63% vs. 5.24% 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 last week, 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 47.17, compared to 43.00 in the prior week. The bullish components in the MMI are the earnings momentum, and monetary policy categories. In contrast, the investor sentiment, technical, liquidity and valuation categories tell a bearish story. This is the second 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


Market Indicators and Strategy Report 20140928 (PDF)