Confessions of a bear

Below are some market stats that I recently collected from a few research sources. They are largely fundamental rather than technical, but should still be of interest to readers of this blog. I will admit a “confirmation bias” here. I am bearish in the short to intermediate term. These comments back that bias. At least I admit my bias!

Pre-comments disclosure: I am long a VIX ETF (Horizons HUV-T) with a short termed trading horizon, and two bear/Inverse ETF’s (HDGE-US and HIU-T) with a short to intermediate termed trading horizon. Readers should conduct their own diligence when considering these strategies.

 

Analysts upgrades

 

Market sentiment specialists at Sentimentrader note that analysts tend to upgrade or downgrade stocks in knee-jerk reactions to current market movements. If markets move up, they don’t want to have mud on their collective faces, so they upgrade stock targets. If markets go down, the reverse happens – stock targets by analysts go down. This phenomenon often peaks prior to reversals in the market. As a contrarian indicator, you look for a rush of increases in stock price objectives by analysts to indicate a market high. The reverse is true for market lows. Sentimentrader notes that the recent rush by analysts to upgrade stocks on the S&P500 – reversing their downgrades made in January (a market low) may be a bad sign. They note a similar pattern as we are seeing today coming into August of 2011 – a date some readers of this blog may recall as a market peak proceeding a 20% correction on that index.

 

Market Valuation

 

  • 720 Global Research notes that Equity valuations are higher than average by many measures. “The current P/E is 55% above the historical mean and surpasses 92% of all P/E data. Only multiples from the 2000 and 2008 bubble periods were higher than today”.

 

  • Doug Short – another research analyst from Advisor Perspectives– created a simple model that averages four common equity valuation techniques. Based on his analysis, “The market is 76% overvalued as compared to the average dating back to 1900.”

 

  • Sentimentrader  notes that we are in line for 6th straight quarter of declining earnings With a trailing PE of 25 (at time of report a week ago), they note that these bad earnings are NOT baked into stock prices and that this is the longest such streak in 140 years. The chart below, courtesy of www.multpl.com shows a trailing PE of just under 24 at this time.

pe

Volatility

Finally, Mark Gerstein wrote in a Forbes article on April 29th that the VIX has historically been higher than 13 over 80% of all days since 1990 and over 83% of all days over the past 12 months. In other words, the odds are, based on history, higher VIX levels at current levels. The VIX has recent risen off of a low of 13 to sit at over 16. My target remains 18-26.

vix short

New articles

I’ve posted a few new articles on line – you can read them here.

 

7 Comments

  • Hi Keith,

    I saw traders exit their $USO positions yesterday but I think their stops were too right. WTI is up 3.6% today. Looks to me like that 43.00 level is strong and has now held for 9 days. You often say you prefer waiting to see the price hold. Does WTI (and hence ZEO/XEG) meet your rules right now?

    Thanks!

    Reply
  • Hi Keith:
    As always we may have the call right but timing is everything. The breadth indicators I follow have touched near historic highs and so as bearish as I want to be given what I see elsewhere and what you have written, this may take awhile. Always enjoy reading and value your opinion. Keep up the good work.

    Reply
    • Thanks Terry–yes true that cumulative breadth (Advance/Decline) looks great–and that’s indicating no end yet to the longer termed bull market. However, some breadth indicators like: New hi/lows and % Stocks over 50 day MA — are at the highs of their historic ranges. The tend to peak and indicate overbought conditions in a short/mid term horizon. Take a look at those indicators on stockcharts.com–and look at the levels they hit prior to most corrections (eg October 14, last summer, and last December). Then look at where they are right now.

      Reply
  • SHILLER C.A.P.E. P/E AT 25.7 (TODAY)
    53.9% HIGHER THAN TH HISTORICAL MEAN AT 16.7
    IMPLIED FUTURE RETURN OF 0.1%
    HISTORICAL LOW: 4.8
    HISTORICAL HIGH: 44.2
    $SPX AT 2050.6 (TODAY)
    “REGULAR” P/E: 24 (MEAN AT 15.9)
    (SOURCE: GURU FOCUS)

    WHAT ABOUT THE BUFFET/MUNGER INDICATOR?
    STOCKCHARTS SAYS (TOM BOWLEY) THAT THE $VIX NEEDS TO BE OVER 17 TO HAVE A MEANINGFULL SUMMER CORRECTION
    MR MEISELS NEEDS A $SPX ABOVE 1925 FOR A BULL MARKET ALIVE AND WELL, THAN WE SHOULD PROCEED TO A NEW ALL TIME HIGH IN 2016 (THE FIFTH LEG UP WILL COME BEFORE THE REAL CORRECTION)
    BROOKE THACKRAY DOESN’T AGREE AT ALL ON THAT SUMMER SCENARIO!
    OVERBOUGHT MARKET FOR THE FORESEEABLE FUTURE, CORRECTION TO ENSUE DOWN THE ROAD?

    Reply
  • Would you recommend bonds now, as a hedge on equities, and if so, long, medium, short?

    Reply
    • Bonds can be a good seasonal bet over the summer. The only problem right now with bonds is –there doesn’t seem to be tons of upside left. May be just as well to stay with shorter termed cash-like vehicles–similar yield, no risk

      Reply

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