S&P 500 and Nasdaq test resistance

The bull market continues, with the S&P 500 testing resistance at 2500. Twiggs Trend Index troughs above zero signal buying pressure. Breakout would signal a fresh advance, offering an immediate target of 2600.

S&P 500

The Nasdaq 100 is similarly testing resistance at 6000. Immediate target for a breakout would be 6200.

Nasdaq 100

Hardly an over-heated market

Discussions as to whether the stock market is over-priced normally imply that stocks are about to fall if valuations are too high. But history shows that this isn’t true. The euphoria of bull markets often outruns earnings multiples and only reverses when there is an unexpected fall in earnings.

Earnings multiples (the price-earnings ratio) may rise for two reasons:

  1. Stock prices are rising faster than earnings; or
  2. Earnings are falling and stock prices are declining at a slower rate.

S&P 500 Historic PE

The S&P 500 historic price-earnings ratio (based on the last 4 quarters earnings) spiked above 20 several times in the last three decades:

  • 1991 was caused by falling earnings;
  • 1997 by rising stock prices;
  • sharp falls in earnings were responsible for 2001 and 2008; and
  • declining earnings, particularly in the Energy sector, explain the bump in 2015.

The problem with historic PE is that it looks backward, at the last 4 quarters, rather than forward. If we take the Forward PE, based on the next 4 quarters earnings estimates, we can see that earnings are recovering.

S&P 500 Forward PE

Forward PE dipped below 20 in 2016, indicating that expected earnings are advancing faster than prices.

This does not signal a buy opportunity, which normally presents when Forward PE is close to 15:

  • 1988-1989
  • 1993-1994
  • 2002-2005
  • 2009-2012

S&P 500 and Forward PE

Nor does it represent a sell signal.

Most corporations (98.5%) have reported earnings for June 2017. Estimates are included for the remainder, giving total earnings of $27.00 per share.

S&P project that earnings will grow a further 20% over the next four quarters (Jun-18: $32.40). This may be optimistic but provided earnings grow faster than the index we will see earnings multiples decline.

S&P 500 Forward Earnings Estimates

Hardly an over-heated market.

What does falling job growth indicate?

Job growth fell to 156,000 for August, from a high of 210,000 in June, according to the latest BLS stats.

Job growth

Unemployment ticked up from 4.3% to 4.4% for August.

Unemployment

What does this mean? Very little, if we look at our real GDP forecast based on total nonfarm payroll multiplied by average weekly hours worked. GDP growth is slow but steady.

S&P 500 with Twiggs Volatility

The recently published Philadelphia Fed Leading Index for July has slowed but remains comfortably above the early warning level of 1. The index normally falls below 0.5 in the months ahead of a recession.

Philadelphia Fed Leading Index

The S&P 500 is testing resistance at 2480 after a weak correction that respected support at 2400. Bearish divergence on Twiggs Money Flow continues to warn of selling pressure but this seems secondary in nature. Breakout above 2480 is likely and would offer a target of 2540*.

S&P 500

Target 2480 + ( 2480 – 2420 ) = 2540

The Nasdaq 100 is testing resistance at its all-time high of 6000. Bearish divergence on Twiggs Money Flow again warns of secondary selling pressure. Breakout would offer a short-term target of 6250 and a long-term target of 7000.

Nasdaq 100

Target 6000 + ( 6000 – 5750 ) = 6250

The bull market remains on track for further gains.

S&P 500 Bull Market Continues

The S&P 500 continues with a secondary correction that is likely to test the long-term rising trendline and support at 2400. Bearish divergence on Twiggs Money Flow warns of selling pressure but this seems secondary in nature.

S&P 500

Target 2400 + ( 2400 – 2300 ) = 2500

Twiggs Volatility (21-day), at 0.63% for the S&P 500, is way below the 1.5% warning level for elevated market risk.

S&P 500 with Twiggs Volatility

The yield curve is flattening, with the 10-year minus 3-month Treasury Yield Differential close to 1.0%. But this is still well above the 0.5% early-warning level. A negative yield curve, where the Yield Differential falls below zero, is normally followed by a recession within 6 to 12 months.

Yield Differential

Fed monetary policy remains accommodative, with currency in circulation expanding at a healthy annual rate of 6.9%.

Currency in Circulation

The bull market remains on track for further gains.

S&P 500 bull market on track

The S&P 500 is undergoing a secondary correction that is likely to test the long-term rising trendline and support at 2400. Bearish divergence on Twiggs Money Flow warns of selling pressure but this seems secondary in nature. The bull market remains on track for further gains.

S&P 500

Target 2400 + ( 2400 – 2300 ) = 2500

The Dow Jones Transportations Average is also undergoing a correction. Bearish divergence with Twiggs Money Flow dipping below zero warns of stronger selling pressure. Expect a test of primary support at 8800.

Dow Transportation Average

The Nasdaq 100 is retreating from resistance at 6000. Bearish divergence warns of secondary selling pressure. Breach of primary support at 5600 is considered unlikely.

Nasdaq 100

US: Low CPI and soft Treasury Yields

The Consumer Price Index (CPI) and Core CPI (excluding food and energy) both came in at a low 1.7% p.a. for the 12 months ended July 2017.

Consumer Price Index (CPI) and Core CPI

Source: St Louis Fed, BLS

Long-term interest rates are trending lower as CPI moderates. Breach of support at 2.10% by 10-Year Treasury Yields would signal another primary decline with a target of 1.80%*.

10-Year Treasury Yields

Target: 2.10% – (2.40% – 2.10%) = 1.80%

Bank credit growth is slowing, to the level where it is tracking nominal GDP growth, avoiding some of the excesses of previous cycles. But if bank credit falls below GDP growth that would warn of tighter monetary conditions and the economy is likely to slow.

Bank Credit and GDP growth

Source: St Louis Fed, FRB, BEA

The S&P 500 is testing its long-term rising trendline, while bearish divergence on Twiggs Money Flow warns of selling pressure. But the market appears to have shrugged off Donald Trump’s promises of North Korean “fire and fury” and both of these movements seem secondary in nature. A correction is likely but the primary trend remains on track for further gains.

S&P 500

Target 2400 + ( 2400 – 2300 ) = 2500

Nasdaq and S&P500 meet resistance

July labor stats are out and shows the jobless rate fell to a 16-year low at 4.3%. Unemployment below the long-term natural rate suggests the economy is close to capacity and inflationary pressures should be building.

Unemployment below the long-term natural rate

Source: St Louis Fed, BLS

But hourly wage rates are growing at a modest pace, easing pressure on the Fed to raise interest rates.

Hourly Wage Rates

Source: St Louis Fed, BLS

Fed monetary policy remains accommodative, with the monetary base (net of excess reserves) growing at a robust 7.5% a year.

Hourly Wage Rates

Source: St Louis Fed, FRB

Our forward estimate of real GDP — Nonfarm Payroll * Average Weekly Hours — continues at a slow but steady annual pace of 1.79%.

Real GDP compared to Nonfarm Payroll * Average Weekly Hours

Source: St Louis Fed, BLS & BEA

The Nasdaq 100 has run into resistance at 6000. No doubt readers noticed Amazon [AMZN] and Alphabet [GOOG] both retreated after reaching the $1000 mark. This is natural. Correction back to the rising trendline would take some of the heat out of the market and provide a solid base for further gains. Selling pressure, reflected by declining peaks on Twiggs Money Flow, appears secondary.

Nasdaq 100

The S&P 500 is also running into resistance, below 2500. Bearish divergence on Twiggs Money Flow warns of moderate selling pressure but this again seems to be secondary — in line with a correction rather than a reversal.

S&P 500

Target 2400 + ( 2400 – 2300 ) = 2500

Nasdaq soars

GDP results for the second quarter of 2017 reflect recovery from the soft patch in 2016.

Nominal GDP compared to Nonfarm Payroll * Average Weekly Hours * Average Hourly Rate

Source: St Louis Fed, BLS & BEA

Nominal GDP for Q2 improved to 3.71%, measured annually. This closely follows our intial estimate calculated from Nonfarm Payroll * Average Weekly Hours * Average Hourly Rate.

Real GDP, after adjustment for inflation, also improved, to a 2.1% annual rate.

Real GDP compared to Nonfarm Payroll * Average Weekly Hours

Source: St Louis Fed, BLS & BEA

Bellwether transport stock Fedex is undergoing a correction at present but selling pressure appears moderate. Respect of medium-term support at 200 is likely and would confirm the primary up-trend (and rising economic activity).

Fedex

The Nasdaq 100 gained more than 20% year-to-date, from 4863 at end of December 2016 to 5908 on July 28th. Growth since 2009 has been consistent at around 20% a year but now appears to be accelerating. To my mind that warns sentiment may be running ahead of earnings, increasing the risk of a major adjustment. But there is no indication of this at present.

Nasdaq 100

The S&P 500 continues its advance towards 2500 at a more modest pace. Bearish divergence on Twiggs Money Flow warns of selling pressure but this seems to be secondary in nature, with the indicator holding well above zero.

S&P 500

Target 2400 + ( 2400 – 2300 ) = 2500

VIX hits record low

The CBOE Volatility Index (VIX) made a new low of 9.30 indicating record low levels of stock volatility. High levels of stock buybacks and large ETF fund inflows may both have contributed, but this is only the third time in its 27-year history that index has broken below 10%. The first was in late 1993. The second, in late 2006, was followed a year later by a massive market snap-back. This time is no different. Volatility is unlikely to remain at such low levels and eventually we will see a market down-turn, accompanied by high volatility, but there is no crystal ball that can tell us whether this will be in one year or five.

CBOE Volatility Index (VIX)

Corporate bond spreads are also falling, with the spread between lowest investment grade Baa (10-year) and equivalent Treasury yields at their lowest point since 2008.

Corporate Bond Spreads

Source: St Louis Fed & Moody’s

The yield curve is flattening but remains comfortably above a flat or negative yield curve when
the yield differential (10-year minus 3-month yields) falls below zero. A negative yield curve is a reliable warning of recession within 12 months.

Yield Differential

Source: St Louis Fed

The Freight Transportation Services Index displays a steady increase in economic activity.

Freight Transportation Services Index

Source: St Louis Fed & US Bureau of the Census

And the S&P 500 continues its advance towards 2500.

S&P 500

Target 2400 + ( 2400 – 2300 )

US Retail & Light Vehicle Sales slow

Retail sales growth (excluding motor vehicles and parts) slowed to 2.4% over the 12 months to June 2017.

Retail Sales ex Motor Vehicles & Parts

Source: St Louis Fed & US Bureau of the Census

Seasonally adjusted light vehicle sales are also slowing.

Light Vehicle Sales

Source: St Louis Fed & BEA

Seasonally adjusted private housing starts and new building permits are starting to lose momentum.

Housing Starts & Permits

Source: St Louis Fed & US Bureau of the Census

The good news is that Manufacturer’s Durable Goods Orders (seasonally adjusted and ex Defense & Aircraft) are recovering.

Manufacturing Durable Goods Orders ex Defense & Aircraft

Source: St Louis Fed & US Bureau of the Census

Cement and concrete production continues to trend upwards.

Cement & Concrete Production

Source: US Fed

And estimated weekly hours worked (total nonfarm payroll * average weekly hours) is growing steadily.

Estimated Weekly Hours Worked

Source: St Louis Fed & BLS

All of which suggest that business confidence is growing and consumer confidence is likely to follow. Bellwether transport stock Fedex advanced to 220, signaling rising economic activity in the broader economy.

Fedex

Target: 180 + ( 180 – 120 ) = 240

The S&P 500 broke resistance at 2450, making a new high. Narrow consolidations and shallow corrections all signal investor confidence typical of the latter stages of a bull market. The immediate target is 2500* but further gains are likely.

S&P 500

Target: 2400 + ( 2400 – 2300 ) = 2500

The stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.

~ Warren Buffett

S&P 500 selling pressure

The S&P 500 is experiencing warns of medium-term selling pressure, signaled by bearish divergence on Twiggs Money Flow. The last correction was shallow, typical of stage III in a bull market, and this one is likely to be too. Respect of support at 2400 would signal another primary advance. A correction to test primary support at 2300 is unlikely, but would warn that investors are jumpy and taking profits. This would signal stage III is closer to a top.

S&P 500

S&P 500 hesitates at 2450

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.

S&P 500

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.

Nasdaq 100

Stage III of a bull market can last several years.

S&P 500 stays on course

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.

S&P 500

Bellwether transport stock Fedex is advancing strongly after breaking out above $200, signaling rising economic activity in the economy.

Fedex

Stage III of a bull market can last for several years.

S&P 500, Nasdaq, Fedex bull signal

Bellwether transport stock Fedex [FDX] broke resistance at $200, signaling an increase in economic activity.

Fedex

The S&P 500 followed through above 2400, offering an immediate target of 2500. Recovering Twiggs Money Flow signals medium-term buying pressure.

S&P 500

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.

Nasdaq 100

S&P 500: Tall shadows warn of selling pressure

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.

S&P 500

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.

Fedex

Trump Turmoil

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.

Dollar Index

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.

Spot Gold

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.

Dow Jones Industrial Average

The S&P 500 is headed for a test of medium-term support at 2320. Breach would likewise signal a strong correction.

S&P 500

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

S&P 500 Price-Earnings Ratio rises

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.

Forward Price Earnings Ratio for S&P 500

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.

S&P 500 Bollinger Band Squeeze

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%.

S&P 500

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.