February Market Analysis:
Bear Markets Continues To Maul Optimistic Investors
A month ago I wrote about markets and why investors should expect to see continued downward pressure (If you haven’t already, you can read it here). Since then markets have contracted a few more percentage points and investors experienced extreme volatility as they were whipsawed up and down almost daily.
The market is now nearly 20% off its highs on the NASDAQ and 14% off the highs of the S&P 500. It’s been a hard month and a half to start 2016, but the road ahead may just get bumpier. It’s been several years since we’ve had a correction like this so it’s only natural. The question is whether this is the 3–4 year variety or the 6–7 year variety that cuts even deeper (see my last post for context). Time will tell…though I’m sticking with the Bears right now and here are a few reasons you might consider joining the team:
P/E Ratio: Came down from last month, but still extremely high relative to historic averages. The NASDAQ and S&P 500 are both above 20 while the historic averages hover between 15–17. Still plenty of room to move lower in order to bring market P/E rations back to non-elevated levels.
Price-to-Book Value: The S&P 500 is at ~2.6. When viewed in context of the last several years and part corrections/downturns this number is still relatively high. Potentially indicating that there is still room to go lower in this market.
Dividend Yields: Still extremely low versus historic averages with very little growth over the past several months. Transportation and Utilities actually declined from last month. All bearish indicators.
Money Supply: Seasonally adjusted money supply continues to show slowing growth. M1 actually declined between November and December and M2 money supply showed a minimal increase. Yet another bearish sign for markets especially when compared to last year at the same time when money supply expanded significantly.
Bank Reserves: A semi-positive sign for markets is that Free Reserves grew from last month. The growth, however, was minimal and still significantly below the free reserves measured in December. Should this trend continue and/or pick up steam then we may begin to see indicators turning more neutral or even bullish.
Margin Debt: Still plenty of margin debt outstanding. Meaning that people are still leveraging their accounts with anticipation that the market may move higher. This relative number has grown over the past several years — as the market has moved higher — and peaked in April 2015 roughly coinciding with the market top. Despite the market coming down nearly 20% the margin debt outstanding is still rather high and leaves a lot of room for continued selling with limited free cash to invest further into the market…margin calls anyone?
Fed Fund Rate: While the ECB and Bank of Japan moved to negative rates over the past week, the Fed has given no signal that it intends to slow or decrease interest rate hikes. With additional rate hikes as a possibility we should continue to anticipate further downward pressure on markets.
Discount Rate: While it hasn’t explicitly been discussed we should anticipate further increases as the Fed Fund rate is raised. Again, adding to the downward pressures of markets.
Contracting Interest Spreads: Treasury and Commercial Paper rates are contracting. This potentially indicates ongoing poor economic conditions which does not bode well for markets attempting to move higher.
Fewer Companies Making New Highs: Still an extremely low number of companies relative to historic performance. The market has been consistently holding down stocks from reaching new highs. Only 6.5% of stocks on the NYSE reached new highs last week while even fewer reached new highs on the NASDAQ (<2%).
More Companies Making New Lows: The number of companies that continue to make new lows remains high with very little month-over-month change. The market hasn’t yet shifted away from downward pressures. More than 12% of stocks last week reached a new low which is only slightly lower than the previous month’s count.
% Below Key Moving Averages: Markets are still below key moving averages. We would expect to see a slow turn in the long tailed moving averages, but this has yet to occur. The current levels indicate there may be a short-term turnaround to recoup some losses, but overall the readings are remain extremely bearish and share similar traits to historical corrections.
Accumulation vs. Distribution Days: Total net distribution days (total distribution days minus total accumulation days) over the short-term and trailing 90 days are still heightened, further illustrating a weakened market. More concerning is that fact that net distribution days continues to increase despite being at relative market lows. Compared to historical measures the current market state is inline with other corrections and we’ve yet to see any substantial net buying.
Total Shorts-to-Volume: Throughout the current drawdown the TS/TV ratio has remained relatively flat. Unlike the fluctuations over the past several years that coincided with market changes, the current environment is not overly elevated. As a contrarian indicator the lack of movement is a bearish sign.
Put-to-Call Ratio: Elevated levels of P/C ratio. Weekly averages are more than 1 with the ongoing count over the past 3 months at 8 weeks of levels at 1+. Been at a count of 5 or more for the last 28 weeks, with the exception of one week that was at 4. The last time the market was at these levels? July 2011 preceding the market downturn of approximately 15% for the S&P 500.
Investor Sentiment: Investors are unsure whether to be bullish or bearish as shown in various sentiment readings. Most indicate that ~50% of investors are either bullish or neutral; sentiment has not reached an extreme on either end. This makes it difficult to gauge since extremes typically indicate market tops (overly bullish sentiment) or market bottoms (overly bearish sentiment). Even more concerning is the divergence in several sentiment readings over the past several weeks. In some reports investors are becoming more bullish while in other reports investors are becoming more bearish. Investors haven’t yet agreed on a single market state.
Hawkish Talk From Federal Reserve: Fed Chair Janet Yellen’s recent remarks on economic outlook and monetary policy were seen as hawkish. Little was said about lowering rates which does not ease the market, though provides some stability long-term.
A quick excerpt from her testimony in front of the House of Representatives:
— Of course, monetary policy is by no means on a preset course. The actual path of the federal funds rate will depend on what incoming data tell us about the economic outlook, and we will regularly reassess what level of the federal funds rate is consistent with achieving and maintaining maximum employment and 2 percent inflation. — Janet Yellen on Monetary Policy
— Still ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad. Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen. — Janet Yellen on Current Economic Situation and Outlook
Let me know your thoughts about the above analysis. Is it helpful, useless, what works, what doesn’t, and what would other indicators would you like to see included?
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