MMI Says Stay Bullish
Our Major market Indicators turned bullish in the week ended September 7th. The MMI indicators fell to 62.50 from 67.83 last week, but still firmly in a bullish range.
MARKET SENTIMENT INDICATORS: Bearish
The Put/Call ratio on the CBOE rose to 64/100 vs. 59/100 last week, so moved into the bullish range on this indicator. On the flip side, the TIM
Group sentiment indicator fell out of the bullish range. This week’s TIM was “50”, so just out of bullish range. The two changes offset each other, so our net score for market sentiment is unchanged.
TECHNICAL INDICATORS: Bullish
Technical indicators remain bullish, though the score fell for the week. The ratio of the advancing vs. declining share trading volume on both the
NYSE and the NASDAQ fell to less than bullish levels, with ratios of 0.95 and 1.11 respectively. The number of advancing stocks vs. declining stocks
on the NYSE fell out of the bullish range also. This ratio is down to 0.75, meaning for every 3 stock issues which went up, 4 went down. Finally, we
score the ratio of 10 Day moving average of up volume vs. down volume for stocks on the NYSE, and this fell to 1.35 vs. 1.63 last week, a bit below
our standard for bullishness. Still, many technical indicators remain strong enough for the total category to remain bullish.
LIQUIDITY INDICATORS: Bullish
Our total score on liquidity indicators remained unchanged. Mutual funds saw a positive $4.5 B inflow this week, for a 4 week total of a positive $4.5B (vs. $7.3B 4 week total last week). Trailing 4 week new cash takeover announcements improved to $22.6B vs. $20.5B last week. Buyback announcements trailed off this week – but still positive at $1.8 B. The four week total stood at $12 B. Total liquidity ended up a positive $36.5 B vs. $37 B last week. We note that there were no IPOs or secondary stock offerings priced this week. Although there is a full pipeline (including the impending Alibaba) it will take another week or two for the investment banking community to rev up the deal engine, post the end of summer lull.
VALUATION INDICATORS: Bearish
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 9/5/14 at 2007.71. This is 17.69X the TTM EPS. We set a fair value P/E for the index at 18.73X. Thus a target for the SPX using the fair P/E = 2241.95, representing an upside of 11.7%. The trailing P/E of the bellwether small cap mutual fund (PRNHX) is 1.60 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 = 103.5%, while market cap to GDP at 140%.
EARNINGS MOMENTUM INDICATORS: Bullish
Our MMI scoring for earnings momentum did not change for this week. The earnings factors remain bullish, with almost the entire S&P 500 having already reported. Briefly, we’ve seen strong results for Q2:14. The surprise ratio for the quarter (positive vs. negative) was 3.13 X. Earnings estimates
for Q3:14 estimate +6.5% earnings growth, though this is down from the +8.9% consensus estimate back on 6/30/14. However the full year 2014E holds a +7.4% estimated growth rate of S&P earnings. The S&P 500 is now trading at 16.77X 2014E and 15.04X 2015E.
MONETARY POLICY: Bullish
Our MMI scoring for monetary policy did not change for the week, and the solons at the central bank remain accommodative. A key indicator we look at, so-called excess liquidity remains strong. The year over year change in M2 is +4.32% which the change in nominal GDP = 1.57%, so the excess of M2 over GDP stood at 2.76%.
In summary, our MMI score remains in the bullish zone, at 62.50. 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. We maintain a bullish posture.