S&P 500 Rise Depends On Small Number Of Stocks, Yellow Lights Flashing
$SPY
The Key US stock index, S&P 500, is flashing signals that were seen before major declines in the last 40 yrs.
Market participant complacency and expensive valuations are bad signs, while the S&P 500 index is within 1.6% of its record high. The market’s dependence on a lessening number of stocks is alarming.
“When investors are risk-seeking, they tend to be risk-seeking in everything,” fund manager John Hussman said in a 27 July market commentary. “When market internals begin to break down, it’s a signal that investor preferences have shifted toward risk-aversion. In that environment, previously benign overvaluation can quickly become disastrous.”
The S&P 500 has 3X in value since bottoming on 9 March 2009 when the US struggled through the worst economic contraction since the Great Depression. As business activity recovered and the US Fed kept interest rates at record lows, the index rebounded to a record close of 2,130.82 on May 21. It has fallen about 1.4% since then.
The problem with the market’s push into record territory is that fewer and fewer companies are participating in the rally, Mr. Hussman said. An important sign of risk-aversion among investors is evident in the lower percentage of stocks that are trading above their 200-Day MAs.
Mr. Hussman cited the metric among the indicators that foreshadowed declines after peaks in 1972, 2000 and 2007:
1. Less than 27% of investment advisers polled by Investors Intelligence who say they are Bearish.
2. Valuations measured by the Shiller price-to-earnings ratio are greater than 18X.
3. Less than 60% of S&P 500 stocks above their 200-Day MAs.
4. Record high on a weekly closing basis.
“The most recent warning was the week ended 17 July 2015,” Mr. Hussman said. “It’s often said that they don’t ring a bell at the top, and that’s true in many cycles. But it’s interesting that the same ‘ding’ has been heard at the most extreme peaks among them.”
Meanwhile, the S&P 500 completed its 3rd major week of earnings reports on July 24, with 56% of companies now reporting.
Overall, 64% of companies have beaten on EPS, 50% on sales and 35% on both,while sales beats are still below average, the proportion of companies beating on both metrics is in-line with history and the proportion of EPS beats is well above average.
HeffX-LTN Analysis for SPY: | Overall | Short | Intermediate | Long |
Bearish (-0.48) | Very Bearish (-0.57) | Bearish (-0.40) | Bearish (-0.47) |
Stay tuned…
HeffX-LTN
Paul Ebeling
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