The S&P 500 hesitated at 2450, short of its target of 2500*. Bearish divergence on Twiggs Money Flow warns of medium-term selling pressure. Expect stronger resistance at 2500.
Tech stocks are advancing at a rapid pace, with the Nasdaq 100 approaching 6000 after only breaking 5000 in January. Rising troughs on Twiggs Money Flow signal strong buying pressure. No signs of a ‘blow-off’ yet.
Stage III of a bull market can last several years.
The S&P 500 continues to advance, with a short-term target of 2500*. Bearish divergence on Twiggs Money Flow warns of rising selling pressure. While secondary (medium-term) in nature we should expect stronger resistance at 2500.
Bellwether transport stock Fedex is advancing strongly after breaking out above $200, signaling rising economic activity in the economy.
Stage III of a bull market can last for several years.
Bellwether transport stock Fedex [FDX] broke resistance at $200, signaling an increase in economic activity.
The S&P 500 followed through above 2400, offering an immediate target of 2500. Recovering Twiggs Money Flow signals medium-term buying pressure.
The Nasdaq 100 has gained more than 20% in the last 3 months, since breaking resistance at its Dotcom high of 4800. With Amazon breaking through $1000, I am concerned that tech stocks are over-heating.
The S&P 500 is recovering after Wednesday’s sharp fall but tall shadows on the last two candles indicate selling pressure. This is supported by a bearish divergence on 21-day Twiggs Money Flow, signaling medium-term selling pressure. Respect of resistance at 2400 is likely and would warn of another test of primary support at 2330.
Bellwether transport stock Fedex [FDX] has consolidated in a broad rectangle over the last six months. Bearish divergence on 13-week Twiggs Money Flow indicates long-term selling pressure. Breach of support at 185 would signal a primary down-trend, warning that economic activity is slowing.
Discussion of a possible impeachment action against President Donald Trump is rife in the media and seems to have spooked financial markets.
The Dollar Index fell through support at 98.50, signaling another decline. The long-term target is 93.00.
Gold rallied, breaking through resistance at $1250/ounce. Follow-through above $1300 would signal another advance, with a target of the 2016 high at $1375.
Dow Jones Industrial Average retreated from resistance at 21000. Expect a test of medium-term support at 20400. Reversal below 20000 would be cause for concern.
The S&P 500 is headed for a test of medium-term support at 2320. Breach would likewise signal a strong correction.
We are likely to get a secondary correction but I expect the bull market to continue. Impeachment of Trump would be a temporary setback and would make me more bullish on the long-term outlook.
It’s probably better to have him inside the tent pissing out,
than outside the tent pissing in.~ President Lyndon Johnson on FBI Director J. Edgar Hoover whom he mistrusted
With 84.4% of S&P 500 index constituents having reported first-quarter earnings, 302 (73.84%) beat their earnings estimates while 77 (18.83%) missed. Forward estimates for 2017 contracted by an average of 4.6% over the last 12 months but not sufficient to raise the forward Price-Earnings Ratio above 20. That is the threshold level above which we consider the market to be over-priced.
Comparing the forward estimates for 2017 to actual earnings for 1989, we see that the market is expected to deliver a compound average growth rate of 6.0% over almost three decades.
With a dividend yield of 2.16%, that delivers a total return to investors of just over 8 percent.
Price-Earnings ratios fluctuate over time, so any improvement in the ratio should be considered temporary.
Buybacks have averaged just over 3 percent since 2011. The motivation for buybacks is that they should accelerate earnings growth but there is little evidence as yet to support this. As Reported Earnings grew at an average rate of 3.2% between December 2011 and 2016, below the long-term average.
A spike in earnings is projected for 2017 and 2018. Hopefully this continues. Else there will be a strong case for restoring dividends and reducing stock buybacks.
John Bollinger says that a Band Width squeeze has preceded many spectacular moves on the S&P 500. A Bollinger Band squeeze highlights when the bands contract into a narrow “neck” indicating low volatility. The squeeze is normally signaled by a fall in the Band Width indicator to below 2.0%.
Upward breakout from a narrow “squeeze” in late January flagged a strong advance, from 2280 to 2400.
Now we have the opposite, with breakout below 2360 warning of a correction. But Bollinger warns that the market often starts with a fake move, in the wrong direction, before the real move commences. So we need to be cautious.
Dow Jones Industrial Average continues to climb, heading for a target of 21000. Rising troughs on Twiggs Money Flow signal strong buying pressure.
The S&P 500 follows a similar path.
With the CBOE Volatility Index (VIX) close to historic lows around 10 percent.
However, at least one investment manager, Bob Doll, is growing more cautious:
“…we think the easy gains for equities are in the rearview mirror and we are growing less positive toward the stock market. We do not believe the current bull market has ended, but the pace and magnitude of the gains we have seen over the past year are unlikely to persist.”
Bob Doll’s view is reinforced by recent developments with the S&P 500 Forward Price-Earnings Ratio. I remarked at the beginning of February that the Forward P/E had dropped below 20, signaling a time to invest.
Actual earnings results, however, have come in below earlier estimates — shown by the difference between the first of the purple (latest estimate) and orange bars (04Feb2017) on the chart below.
In the mean time the S&P 500 index has continued to climb, driving the Forward P/E up towards 20.
This is not yet cause for alarm. We are only one month away from the end of the quarter, when Forward P/E is again expected to dip as the next quarter’s earnings (Q1 2018) are taken into account.
But there are two events that would be cause for concern:
Either of the above could cause Forward P/E to rise above 20, reflecting over-priced stocks.
Be fearful when others are greedy and greedy only when others are fearful.
~ Warren Buffett
The forward Price-Earnings (PE) Ratio for the S&P 500, depicted by the blue line on the chart below, recently dipped below 20. In 2014 to 2105, PEs above 20 warned that stocks were overpriced.
We can see from the green and orange bars on the chart that the primary reason for the dip in forward PE is more optimistic earnings forecasts for 2017.
We can also see, from an examination of the past history, that each time forward PE dipped below 20 it was an opportune time to buy.
History also shows that each time the forward PE crossed to above 20 it was an opportune time to stop buying. Not necessarily a sell signal but a warning to investors to tighten their stops.
Quarterly sales figures are only available to June 2016 but there are two stand-out sectors that achieved quarterly year-on-year sales growth in excess of 10 percent: Consumer Discretionary and Health Care.
Interestingly, apart from Energy where there has been a sharp drop in earnings, sectors with the highest forward PE (based on estimated operating earnings) are the defensive sectors: Consumer Staples and Utilities. While Consumer Discretionary and Health Care are more middle-of-the-pack at 16.7 and 15.4 respectively.
Tech-heavy Nasdaq 100 broke through its all-time high at 4900, first reached in the Dotcom bubble of 1999/2000. Follow-through above 5000 would signal another primary advance. Bearish divergence on 13-week Twiggs Money Flow warns of medium-term selling pressure, possibly profit-taking at the long-term high.
The daily chart of the S&P 500 also shows bearish divergence, but on 21-day Twiggs Money Flow, indicating only short-term selling pressure; reversal below zero would warn of a correction. Target for the advance is 2300*.
* Target medium-term: 2100 + ( 2200 – 2000 ) = 2300
The chart below plots Forward PE (price-earnings ratio) against S&P 500 quarterly earnings. Apologies for the spaghetti chart but each line is important:
The recent peak in Forward PE was due to falling earnings. Price retreated at a slower rate than earnings as the setback was not expected to last. Forward PE has since declined as earnings recovered at a faster rate than the index. But now PE seems to be bottoming as the index accelerates. Reversal of the Forward PE to above 20 would be cause for concern, indicating stocks are highly priced and growing even more expensive, as the index is advancing at a faster pace than earnings.
Remember that the last five bars are only forecasts and actual results may vary. The only time that the market has seen a sustained period with a forward PE greater than 20 was during the Dotcom bubble. Not an experience worth repeating.
