Before getting into this month’s Bear-o-meter reading and interpretation, I thought I would quote Larry McDonald – who’s institutional research reports I have been subscribing to for several years. Larry’s research isn’t cheap, but he’s one of the more accurate analysts on the street. His background as head junk bond trader at Lehman’s (which was a profitable division) and his AGC analytics team offer deep insight into markets and the events that affect them. He is known best for his deep value contrarian ideas- something that we have been more receptive to at ValueTrend of late.
Larry feels that the US markets are overdone –as do I. He assigns a pretty scary valuation to the market. Here is his quote:
“We see 2019 S&P 500 earnings closer to $155-160 and put a 15-16x multiple on it as geopolitical tensions don’t fully subside. So, a trading level of 2325-2560 looks more likely to us.”
Yikes! If this valuation came from another analyst, I would dismiss it. But Larry tends to be very insightful, and does not make projections lightly. He also tends to be right more often than not. Keep it in perspective, as nobody knows anything for sure at the end of the day. But be mindful of his valuation as the market approaches its October 2018 highs. Failure by the SPX to pop through 2900 or so might drive markets back.
Anyhow, on with the Bear-o-meter report.
The most recent reading of the Bear-o-meter report shows a move from the ‘neutral zone” shown in my last update – into the “bullish” zone. The reading sits at 7 now – which is one point below the highest reading it can have. Since the last report in March, none of the 11 indicators have turned in a negative score. Two of the indicators turned positive from a prior neutral or bearish reading. Specifically:
The percentage of stocks trading over their 50 day SMA’s went from overbought in March to neutral. However, the indicator continues to flirt just below the overbought level of 85..its at 81% as of Friday.
The TRIN/TRAN went from non-confirmation to confirmation between the two indicators (ie the transports moved up with the industrials—whereas last month they were diverging).
And the cumulative Advance/Decline line – which is the most important breadth indicator in the Bear-o-meter’s compilation – is now bullishly diverging from the SPX by making new highs (vs. no new highs by the SPX).
The market is bullish right now. Larry McDonald will quite probably correct in his valuation assessment and targets for the US markets. However, that prognostication may take a while to materialize. For now, the technicals are saying to stay the course.
Some of you are aware that we held some cash back in December. As the market moved up from January, we legged in a step at a time. We now sit at 12% cash in our equity model—considerably down from the 30% we held going into December. We continue to emphasize “value” trades over “growth” investments lately. I’ll write a blog on that later this week with some specific ideas. As such, we buy when we find a security at the right price, and hold cash until these opportunities appear. Our cash holdings are not a statement about the markets as much as they are a statement about the availability of bargains on the market. We do expect to find new opportunities – but we are not rushing into anything. After all – there is a reason that Larry is concerned about fundamental valuations right now.
Being the agile traders we are – we will be the first to react if Larry’s fundamental projections materialize through chart breakdowns. Until then, the Bear-o-meter tells us to stay the course.
Good to hear you will offer some buying ideas later. I was wondering if you would offer some preliminary insight on the S and P consumer discretionary stocks. The XLY appears to have made an upward move as compared to most sectors during the past month. I have been preparing to add to my position in the XLP (consumer staples) in light of the upcoming summer (i.e sell in May) months. I have noticed that the XLP has been lately under performing the XLY on a relative basis. What do you think?
Thanks for your comments
Funny you mention this–we are tearing apart the XLP right now looking for ideas–the sector has indeed underperformed. As you may have read, we are buying “value” more than “growth” lately. I will post on this topic later this week with some ideas–but if you follow my work, you will know already that we moved into emerging markets, commodities and some individual stocks like Onex after they formed a bottom. We like stocks and sectors and countries that have fallen, based and broken out. Staples have a few such examples.
Thanks for your comments Keith. I am pleased that you have verified my feelings about the XLP. You may have discussed the concepts of value and growth previously and you may wish to redirect me to the relevant blog. Nor do I recall coming across these terms in any of your books that dealt with concepts in technical analysis. In the popular media these concepts are probably “oversold” and overused by a multitude of analysts. The fact that you used the quotation marks shows you realize the problematic nature of these terms. I (and perhaps other readers of your blog) would appreciate a more thorough education on these concepts from your point of view.
Joe, you nailed it!
The concepts of value and growth are indeed pretty unquantifiable.
So, from my perspective, I am looking at things technically–and a value stock or sector or country or commodity is simply something that has been in a downtrend, has been hammered to death, but then started to make a base. If that base proves valid, its a potential “value” trade–the base – as far as I am concerned- is suggesting the stock (etc) is returning from undervalued back to fair value.
Same with range bound stocks. We had to sell CVS and WGB – but clearly they were range bound prior to the breakdown. The bottom of the range after testing and bouncing suggests an oversold value orientated position. I have had good luck with these types of plays before (CVS and WGB aside)–MDLZ has been played a few times off of bottoms, for example. We’re trying that range bound bounce play on a commodity ETF right now. Bottom of range is “undervalued”–top is “overvalued. Again–purely technical.
Fundamentally, I can’t define value. Craig in my shop attempts to do so, but its not an exact science. You could google the term. Its more or less a term used to define a stock trading near the low end of its historic PE ratio range–but that is probably way over simplifying things.
How about Biotechs right now Keith? Are there any U.S. That are technically calling out for a buy right now? And what prices are your get in and out?
they probably have 5-10% more upside before old highs (resistnace)–thats just based on XBI and IBB charts –not really watching the individual stocks there yet