Major Market Indicators (MMI) Report July 2020
July 2020 MMI Report
The Big Mo.
While most of our near-term valuation indicators confirm a fairly valued market, technical and sentiment indicators and continued aggressive stimulus from the Fed keep the market in a bullish mode.
Market Sentiment: Bullish
The VIX and VXN registered in the mid 20s to low 30s, showing slightly elevated volatility. At 1.43-to-1, the put/call ratio on the S&P 500 is elevated. The bull to bear ratio scores in at 0.68 and finally, the short interest on the Nasdaq is 3.65 days to cover which is also elevated.
Exhibit 1: VIX 1-Year Chart
Technical Indicators: Bullish
The market shows a healthy expansion, thus becoming more inclusive. New highs to new lows register firmly in the bullish camp at 147 to 9. Last week, the NASDAQ advance/declined volume ratio registered 2,258 up to 1,454 down. The 10-day moving average on up/down volume on the NYSE is mildly positive at 1.2 times while on the NASDAQ, the ratio is much stronger at 1.5 times. Confirming the expansion and showing a broadening of the bull market are five of the six major market indices that are now above their 200-day moving average. The sole laggard is the equal weighted small cap index.
Exhibit 2: SPY 1-Year & 200 Day Simple Moving Average
Liquidity Indicators: Neutral
Powered by two large M&A deals, the Eldorado/Caesars merger and the Chevron takeover of Noble, net inflows ran to a barely positive $1.5 billion. Surprisingly, net outflows from equities were over $20 billion and inflows into bond funds were over $25 billion. Meanwhile, underscoring the heightened aversion to risk, over $4.5 trillion is parked in money market funds, an outsized 13.8% allocation relative to the total market capitalization of current equities. This sidelined cash provides ample fuel to power equity prices higher.
EPS Momentum: Neutral
The chopping block for EPS estimates seems to have reached a trough in Q2. Full year earnings estimates have been reduced by over 25% to $123 for 2020. The S&P PEG ratio scores a 19.96 reading, significantly over the 2.58 reading necessary for a bullish score. EPS is projected to grow over 26% next year.
The market to replacement cost indicator shows the market is priced at a 20% premium to replacement cost. For this indicator to be bullish, we would need there to be a discount. Currently, total market cap exceeds GDP by 1.53 times. This indicator points to a fully priced market at these levels. However, the EPS yield exceeds the quality corporate bond yield by 78 basis points which is encouraging on a relative basis. Our S&P 500 target based on earnings projections and multipliers, projects an S&P 500 fair value of 3,071, (5)% below the close on July 21.
Monetary Indicators: Bullish
As a result of the historical and aggressive maneuvers by the Fed both in fiscal and monetary actions, our excess liquidity indicator registers a positive 448 basis points. With another round of stimulus being negotiated, liquidity looks to be more than sufficient, thus the adage “do not fight the Fed” appears to be true at this time. Term spread is a positive 48 basis points, showing a bullish upward tilt to the term spread yield curve. High yield bond rates are providing a 512 basis point premium to 10 year Treasuries, a very bullish sign and further showing a modest value available in high yield bonds.
Exhibit 3: U.S. 10-Year Treasury Yield Over 1 Year
In summary, our indicators show a virtual stalemate with the caveat being the extreme stimulus from the Fed, giving the nod to the bulls. In the area of irrelevant annoying information, Jeff Bezos made $13 billion in the market on July 20.
By the way, here are some market election year statistics. Since 1988, the S&P 500 average annual return has been 4.9%. Excluding 2008, the average annual return has been 10.9%. Six of the eight election years have posted positive returns.
Case A = S&P 500 at 3,375
Case B = S&P 500 at 3,568
Robert Maltbie, CFA
Founder and President of Singular Research
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