Major Market Indicators (MMI) Report: February 2021
February 2021 MMI Report
Indicators tilt bullish led by earnings momentum. As of February 3, 2021, the S&P 500 was 3,830. We have a fair value for the S&P of 4,050.
Our macro market indicators skew positive with scoring led by strong market technicals, extremely strong earnings momentum, and ongoing pedal to the metal monetary and fiscal stimulus policies. However, Wall Street banks, the opportunists, are hitting this window with huge equity issuances approaching $90 billion in January.
Market Sentiment: Negative
The VIX is at 33 and the VXN on the NASDAQ is 37, both sitting at elevated fear levels which is a positive. The bulls to bear ratio has registered a more neutral reading at 0.98 bulls for every 1 bear. Bond market confidence indicators show a significant spread between A and BB rated corporate bonds, underscoring a strong level of support for corporate expansion.
Technical Indicators: Positive
Each major equity index is comfortably above its 50 and 200-day moving averages. Hit by one of the worst weeks since October, advance and decline volume scored at 0.28 while advancing issues lagged declining issues by 0.34 to 1, reflecting some distribution. Although we do not have the data just yet, we believe market short interest ratios are bearish due to high levels of short covering spurred by the Game Stop and AMC squeezes.
Liquidity Indicators: Negative
Although cash inflows to equity funds, cash takeovers, and stock share buybacks have added $10, $7.1, and $2.2 billion, respectively, total inflows are dwarfed by the magnitude of equity issuances which exceeded $88 billion in January. Equity issuances for the first half of February are trending towards $22 billion. Cash balances and money market funds have exceeded $4.3 trillion, a level that has held relatively steady since the equity market rally began in October 2020. Clearly the Fed 's aggressive stimulus of $120 billion per month is finding its way into the equity markets. Meanwhile, leverage, evidenced by the free cash balances in margin accounts at 29%, is approaching historically high levels.
EPS Momentum: Positive
At this time, we are roughly 50% through the Q4:20 earnings season. Impressively, the average earnings beat is 17% while over 83% of all companies are exceeding estimates for this quarter. Excluding the downtrodden oil sector, earnings revisions turned positive this quarter and for the full year have edged higher from $163 to $170 for the S&P 500.
Our proxy for small and mid-cap growth equities, the T. Rowe Price New horizons fund, trades 39 times TTM earnings versus 25 times for the S&P 500. This amount exceeds a 1.5 times threshold and therefore represents an extended valuation for the small-cap growth stock indicator. Due to the complications of the pandemic and the subsequent recovery of EPS, we estimate a 28 multiplier on $170 earnings per share on forward 12 months for the S&P 500. Applying a 15% discount for this extended time frame renders a fair value of 4,050. With the S&P 500 at 3,850, the upside potential is about 7% at the moment. The EPS yield to corporate yield ratio is currently at 1.1, suggesting approximately a 10% return to parity. In contrast, the year 2000 internet bubble ratio was 0.44 where the earnings yield was 3.3% versus a corporate long-term yield of 7.6%. The current ratio of market cap to GDP is 1.83 times, a premium to 1.25 times which is our bullish threshold. Compared to the internet dot com bubble on this measure, today's market is 20% below what was experienced twenty-one years ago.
Monetary Indicators: Positive
While the Fed has primed the pump, juicing M2 with a year-over-year change of 24.5%, velocity remains down at 1.12 times, a decline of 17.6%. Therefore, our excess liquidity indicator is positive 6.9%, an aggressive stimulative posture. The slope of the yield curve is bullish, showing a positive 90-bps spread between the one-year T-bill and the 10-year treasury bond. Yields are starting to steepen, increasing 14 and 20 bps on the 10- and 30-year maturities as investors are anticipating a significant fiscal stimulus from the Biden administration. Increasing yields will serve as a negative weight on the market due to currently elevated P/E multiples.
In summary, our indicators show a bullish bias that has moderated over the last two months. The dominant factors are technical momentum, earnings upside surprises, and Fed stimulus. We remain significantly below the dot com bubble based on P/E multiples and earnings yield to treasury yield comparisons.
Robert Maltbie, CFA
President of Singular Research
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