Each week, clients are emailed a”stat of the week” or “chart of the week”, or “graph of the week”.
This week, the chart of the week will be shared with this site's readers first, before going to clients. This CNBC clip of the 200-day moving average is pretty significant.
There is an old saw or maxim in investing: the more often a support or resistance level is tested, the more likely it is to fail. The 200-day moving average has been tested a few times in the last year:
- October ’14, where the S&P 500 actually traded through the S&P 500 and then rallied right back above with Q3 ’14 earnings.
- June 29 ’15 was another test.
- July 8th – 9th: the S&P 500 traded through again based on Greece and Grexit, but with Q2 ’15 earnings, the S&P 500 rallied again.
- July 27th: another test of the S&P 500, as China’s stock market plummets and Energy, Gold, and Basic Materials sectors continue to trade lower.
One thing that worries me is that the 200-day moving-average “tests” are becoming more frequent.
The S&P 500 hasn’t seen a 20% correction since April-October, 2011, so technically it has been four years or roughly 1,400 days since the market has seen a feel-it-in-your-toes correction.
What bothers me greatly about the financial media is that pundits and such rarely distinguish between corrections and longer-term bear markets. The decade of 2000-2009 was a permanent loss of capital for some, with two vicious bear markets interrupting what was an otherwise flat period of S&P 500 returns, much like the 1930s.
The likelihood of a longer-term bear market occurring today in the S&P 500, absent some enormous “exogenous shock” seems extremely remote. The period from 2000 to 2009 was a “colon-blow” for excesses that had built up in the bull market in Technology and Financials (the two sectors that led the S&P 500 for the entire 1980s and 1990s bull market), from 1982 to 2000. And even then, Financials didn’t finally tip until 2007, thanks to a 60 year bull market in housing coming to an end.
Seasonally, August and September are usually the two worst months of the year for S&P 500 returns. Maybe it is time for a decent flush.
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Earnings data per Thomson Reuters “This Week in Earnings”:
- Forward 4-quarter estimate: $124.90, versus last week’s $125.10.
- P/E ratio: 16.6(x)
- PEG ratio: still negative based on forward growth rate, but Ex-Energy and looking at this post, the adjusted PEG continues to hover around 2(x).
- S&P 500 earnings yield: 5.94%, down from last week’s 6.02%. Contrast this with the Q1, 2000’s earnings yield of 2%, and the 10-Year Treasury of 5.5%.
- Forward 4-quarter growth rate: -1.50% versus last week’s -1.42%. This trend continues to make me uneasy. With the importance of Exxon Mobil (NYSE:XOM) in terms of the S&P 500’s market cap, Friday morning’s Q2 ’15 earnings release by XOM will likely drag forward Energy estimates lower, which was written about recently on here.
Analysis / conclusion: John Butters of Factset noted in his July 31 “Earnings Insight” that there are “smaller cuts to S&P 500 earnings estimates than average for Q3 ’15 to date.” In English, this means that revisions for Q3 ’15 earnings are less severe than average.
Here is the data from Factset:
- July ’15: -1.5% is the decline in the “bottom up estimate” for the first month of the quarter.
- 4 quarter average: -3.2%
- 20 quarter average: -1.6%
- 40 quarter average: -2.0%
The S&P 500 rose a little better than 2% in July. Per the AAII data, pessimism on the part of individual investors rose to its highest level in 2 years this past week.