Major Market Indicators (MMI) Report: March 2021
Major Market Indicators (MMI) Report: March 2021
Bulls still running, bolstered by a dovish Fed.
Market Sentiment: Negative
Although the VIX and VXN are mildly elevated and trending lower, the NYSE bull to bear ratio is overbought at 0.71 and the bond market confidence indicator is positive, but these are overridden by the AAII Investor Sentiment survey showing an overzealous 2.1 ratio.
Technical Indicators: Positive
New highs dominate new lows 13:1 and advances outweigh declines by 1.35 to 1. While on the NASDAQ, that ratio has declined to 0.91, further illustrating the divergence between the NYSE and NASDAQ. The 10-day moving average on the NASDAQ is 1.3 and the NYSE moves ahead at 1.5. All major U.S. equity indices are above their 200-day moving averages led by the equally weighted small cap index at +49% followed by the equally weighted S&P 500 at +21%. The small cap outperformance demonstrates the broadening of the bull market with the equally weighted mid, small, and value stock indices outperforming.
Liquidity Indicators: Positive
Our liquidity analysis is highly nuanced currently due to extreme government monetary stimulus and a high level of SPAC IPOs. In March, cash takeovers were $8.5 billion; buybacks were $4.85 billion; mutual fund inflows were $25 billion; hedge fund inflows were $3 billion. Although the gross capital raised in IPOs over the last four weeks appears exorbitantly high at $97 billion, adjusted without SPACs, which are essentially a transfer of cash waiting for deployment into an M&A investment within 2 years, the actual number is adjusted downward to $55 billion. The largest issues were a $2 billion secondary raised by VICI properties (VICI), followed by a $1.5 billion IPO from Oscar Health Insurance and a secondary $1.6 billion from Norwegian Cruise lines (NCLH). Insider sales were estimated to be elevated at $2 billion. The powerful monthly actions of the Fed's bond buying were +$120 billion. As a result, adjusted liquidity shows an estimated +$80 billion of inflows into equity markets.
EPS Momentum: Positive
Q1 EPS estimate revisions are +5.6% versus the historical average of -4.2% at this juncture. Positive guidance is up 61% versus the historical average of up 33%. Q1:21 estimated EPS growth is now at 22.1%, the largest increase for a quarter since Q3:18. Revenue growth estimates have increased to 6.2% from 3.8% in December 2020. Energy leads all sectors with estimates up 40% versus those in December, followed by financial up 20% since December. Net profit margins are expected to be a robust 10.8% versus the 5-year average of 10.5%. Forward earnings for the balance of 2021 show continued strength. Q2 EPS is expected to increase 50.7% and revenue growth is expected to increase 16.4%. Q3 EPS and revenues are estimated to increase 17.6% and 7.9%, respectively. This torrid pace tapers somewhat by Q4 with expected EPS and revenues up 13.7% and 7.1%, respectively. Meanwhile, the forward P/E on the S&P 500 is 21.9x versus a 10-year average of 15.9x. Wall Street's mean target for the S&P 500 is 4,439, up 10% from current levels. Using a 25 multiple and a $180 EPS estimate for 2021, we see a fair value at 4,500 for the S&P 500. However, risk adjusted for further increases in interest rates of approximately 40 bps brings our fair value target down to 3,960.
S&P 500 Historical P/E chart on GAAP EPS
The T. Rowe Price growth fund trades 39x versus the S&P at 25x, slightly above the 1.5x parity. The equally weighted Value Line small-cap index trades 20x current earnings.
The market cap to GDP ratio is currently 1.9x above the 1.5x parity level. Only the earnings yield versus the corporate 10-year BBB bond yield is supportive at 1.1x.
Monetary Indicators: Positive
M2 versus Interest Rates
With nominal M2 presently growing 21.2% and applying a 1.4x velocity factor produces an excess liquidity factor of 5.9%. This growth is on par with current GDP dollar growth of +6%. Combining the $1.9 trillion fiscal Covid emergency stimulus with an assumed increase in money velocity to 1.5x generates a market rattling excess liquidity factor of +15%. Although, this appears very bullish for equities in the near term, it is hard to imagine that the 10-year Treasury yield will not drift higher than currently expected. The term structure of the yield curve slopes positive which is bullish. The slope has increased with the jump in 10-year yields of 60 basis points in the last month. Forward rates project a slight uptick in the T-bill. The high yield to 10-year Treasuries spread is +314 basis points, a bearish level which is below parity of 400 bps.
Therefore, the balance of our monetary indicators gives us a bullish reading. We see bond yields replacing Covid data as the new obsession of the day.
In summary, our indicators show a bullish bias that has moderated over the last three months. The dominant factors are technical momentum, earnings upside surprises, and Fed stimulus.
Robert Maltbie, CFA
President of Singular Research
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