S&P 500 Analysis: Valuation, Sentiment and Technicals - June 2020

It's been a very long time since I have done an S&P 500 analysis with valuation, sentiment and technical indicators taken into account. So let's get an updated picture for June 2020.

S&P 500 Valuation

One way to look at value is to check out the CAPE 10 ratio (Cyclically Adjusted
Price Earnings Ratio over a 10-year period). It now stands at close to 30, and that's before "COVID-19" earnings are released.

That's historically very elevated and similar to the 1929 stock market bubble. Expect the number to shoot with earning announcements if the stock market does not correct first.

Corporate earnings tend to revert to the mean over time.

It's a lagging indicator, as Q2 earnings have not been announced just yet. But the chart shows earnings were way above the historical trend before the crisis. July will be interested as earnings announcement will mean this number possibly goes negative.

AAII Sentiment

The stock market is all about people's feelings, and AAII members are not buying the rally, as they have still 48.9% bearish.

We can see the 8-week moving average bullishness chart is still very low.

The AAII sentiment survey used to be a contrarian indicator, but I'm not sure it's still the case. This would mean stocks have further gains, but in this case I suppose AAII investor believe the market will go down in the next six months, and did not really participate in the rally..

Technical Indicators

The RSI-14 (14-day relative strength index) can help us find out if a market is oversold or overbought.

The RSI-14 is now at 54 or close to neutral. This compares to close to 80 in January/February when markets were clearly overbought in the short term.

The NYA200R (percentage of stocks over their 200-day moving average) can be used to determine if only a few stocks participated in a rally.

The current chart shows only about 25% of stocks are above their 200-day moving average meaning the elevated S&P 500 stock market level may be due to some  larger capitalization, while smaller stocks are still suffering, or not participating in the rally just as much.

Conclusion

Apart from the US stock market valuation metrics to which we could add the stock market to GDP ratio, we are not really at extremes while looking at sentiment and technical indicators. So I would be very wary of going long, but at the same time the rally may not be over. Another important metrics for investors in 2020 will also be the Federal Reserve assets purchases, but it's pretty hard to forecast what a small group of people will do, especially during a presidential election year.

Marc Faber July 2012 Market Commentary

Marc Faber has just released the July 2012 market commentary on the gloomboomdoom.com website.

This month report is entitled "We are most deeply asleep at the Switch when we believe to control all Switches" where he discusses investors overconfidence both on the long and short side, and the lack of diversification that may result due to this overconfidence.

He explains that investors should consider carefully that win/win transactions are far less common than win/lose transactions, and usually, either the buyer or the seller makes a big mistake. In order to be successful, you have to make sure that you do not make that big mistake.

There is just one attachment to this monthly market commentary (MMC):

• “Money Illusion and Why the ‘Bond Bubble’ Must Burst.” by Michael A. Gayed,Chief Investment Strategist at Pension Partners, LLC

The report is no available publicly, but Gayed regularly contributes to Marc Faber MMC, and it's not the first time he talks about a "Bond Bubble". His investment outlook is that stocks are going to vastly outperform bonds, at least in real terms.

If you want to receive the Monthly Market Commentary (MMC) by Marc Faber, it is available for 300 USD per year.

Marc Faber October 2011 Market Commentary

Marc Faber has just released its October 2011 market commentary on his gloomboomdoom.com website.

This month report is entitled "They are Ill Investors that think there is no Treasure Island, When They can See Nothing but a Sea of Problems" probably referring to the current bearish sentiment of investors (e.g. AAII September 22 sentiment: 25.33% Bullish vs 48.00% Bearish).

There is no attachment to the monthly market commentary (MMC) this time.

I'll try to post highlights of the Gloom Boom Doom market commentary a bit later.

Update: The October market commentary highlights are now available at http://etf-investment-ideas.blogspot.com/2011/10/marc-faber-october-2011-market_05.html

Using AAII Sentiment Survey to Time the Market

I previously used Market Harmonics Investor Intelligence Survey bull / bear ratio to help me decide whether it would be a good time to invest. As a contrarian investor, a bearish sentiment would indicate a good time to buy and a bullish sentiment would have me stay on the sidelines or sell. However, since the 20th April 2011, they decided to discontinue publishing weekly data from Investors Intelligence and those who wish to obtain weekly Investors Intelligence reports have to subscribe to www.investorsintelligence.com.

Luckily there are other measure of investors confidence such as AAII Sentiment Survey or State Street Investor Confidence Index. The former is a weekly survey of American individual investors, the latter is an index based on North American, European and Asian investors portfolios published monthly.

Today, I'll study the AAII Sentiment Index between 1987 and today to see if it can be used by long term investors to time the market.

The first chart is composed of the S&P 500 (on top) and the 14-day moving average of the percentage of bullish investors (Bottom), since the raw data looks like noise to me.


We can see that during the previous bull market (between 1987 and 2000) on this chart, confidence seemed to build up over time, and since 2000, confidence seem to follow a slow downward trend.

The next chart is identical, except I add buy and sell signals. A buy signal is when the bullish sentiment moving average is at or under 30% and a sell signal when it is over 50%.

Based on those signals, an investor would have bought stocks numerous times between 1987 and 1994, possibly sell in 1997, buy again in 1998 and sell in 2000. During that period, this would have clearly been a winning strategy even tough the investor would have missed positive returns between 1997 and 1998, or possibly completely missed the bubble between 1997 and 2000. But positive returns are extremely easy in a bull market.

Let's see how it performed since 2000. There was another sell signal in 2002, but possibly the investor would not have acted on it due to all the sell signals in 2000. There was a brief buy signal in 2003 (that could have been missed) and then another sell signal shortly afterwards in 2003-2004, so the investor would have missed the 2003-2007 bull market.
Then there would have been a buy signal around Q2 2008 (Bad call) and another in Q1 2009 (Good call), before the last sell signal around Q1 2011.

To conclude, even though this method is far from perfect, it would still have outperformed the market between 2000 and 2011. Usually, one indicator is not sufficient to make a decision, and you may want to use other indicators such as the 14-day Relative Strength Index (RSI) for the S&P 500 or the percentage of stocks above their 200-day moving average as explained in "Is the Stock Market fall over?" Long term investors should also follow Case Shiller CAPE (Cyclically Adjusted Price Earning), with a CAPE below 10 being a buy signal. But you'd have to be very patient...