MMI March 2019
(Below 50 is bearish, above 50 is bullish)
Is this a bull rally in a bear market? Until markets indices make new highs and breadth improves, we are still technically in a bear market. Less than 50% of all stocks are still below their 200 day moving averages, reaching a high of 46% recently. The S&P 500, having experienced a failure to penetrate 2820 several times since last September is attempting to break this level again. At a 51 score, there is not much conviction that a breakout will occur this time. Save a surprise trade deal with China, near term catalysts are not clear cut.
S&P 500 stalling at 2820
Market sentiment :negative this indicator is slightly bearish, the bull/bear ratio below 1x, is our only positive sentiment indicator while Citibank’s Greed / fear indicator is mild but still slightly too zealous. The VIX and VXN in at mid-teens, not at last summer’s complacency levels but reflecting a bullish attitude. Bond spreads are normalized again and TRIN/ARMS index are mildly overbought. MACD shows upside momentum is waning.
As S&P 500, QQQ and DJA averages are above 200 day moving averages, confirmed by unweighted S&P 500. Meanwhile, the Russell 2000 small cap index was just turned back below its 200 day moving average.
QQQ above its 200 day Moving average
The mystery of what sources of funds has powered to rally off the Christmas Eve bottom remains to be wholly solved, but it looks like a combination of share buybacks, inflows from money markets funds and some short covering were the catalysts. This indicator shows only $4-5 billion of net inflows over the last four weeks. This is below our minimum threshold of $20 billion to generate a bullish reading. Contributing positive factors are 1) a high level of money market assets, currently over $3.3 trillion, representing over 12% of total US equity market cap and 2) closure of IPO & SPO markets due to the recent government shutdown which prevented SEC review of these offerings.
Valuations : Positive
Based on 2019 S&P 500 eps estimates, the market is +/- 5% of fair value at 16x. The ftm eps yield is 6.09% vs BAA corp. Bond yield of 4.95% protecting the argument that growth is undervalued.
The market is slightly above fair value vs GDP at 1.42 x and replacement value is not cheap at approximately 1.2x. Assuming a PE at parity of bond yields, discounted by 10% multiplied by eps of $169 for 2019, which assumes a modest + 3.5% eps increase, we derive 3070 as fair value, this represents +12% total return potential.
Earnings momentum: Negative
We are uncomfortable with the assumption that the “market” has priced this in at press time. Most revisions are trending steadily down. Q1 2019 eps has been cut by 6.6% to a -3.4% estimate for Q 1 2019. Negative guidance on individual company estimates is -74% vs. a historical -71% average. It is the largest y/y decline since q2 2016. Similarly, the market bottomed ahead of this in Feb 2016. Q2 2019 eps estimates is +0.2%, with revenues +4.6%, Q3 2019 eps estimate is +1.7% with revenues +4.5%, Q4 2019 eps estimate is +8.1% with revenues +4.8%. CY 2019 e is + 3.9% with revenues + 5.0%. CY 2020 eps is forecast at a robust + 11.5%. Meanwhile, net profit margins continue to rise, from 10.7% of revenue in q4 2017 to 11.4% in q4 2018. The largest sector declines in eps in q1 2019 are expected in energy, materials, technology and info tech. The source of the slowdown is Europe and Asia, while domestic US companies are expected to be positive +6%. Fully 38% of S&P 500 revenues are derived from abroad.
Monetary Indicators: Positive
Our proprietary excess liquidity indicator is now bullish, showing a Fed that is again stimulating the economy. Our excess liquidity indicator, which compares monetary growth adjusted for velocity vs GDP weighs in at +115 bps. The yield curve spread ratio, comparing the 2 year treasury to the 10 year treasury is .95 which is still positive, below 1 but very flat at only +12 bps. High yield is just a hair below attractive at +396 bps to the 10 year treasury. +400 bps is considered attractive. Finally, as mentioned, the level of liquidity representing potential buying power in money market is over $3.3 trillion or nearly 12% of total domestic equity value. Over 10% is generally bullish.
Addendum to the 1%
Underscoring a call for higher taxes and wealth redistribution are these data points: Median Household income in 2000 = $61,279 vs $ 60,714, in 2018 adjusted for inflation. And a lower proportion of public equity as % of total net worth at 29% vs 40-45% in the 70-& 80’s, reflecting the effects of more wealth being owned privately.
Robert Maltbie Jr. CFA