The S&P 500 finished Friday at a new all-time high of 1744.50. The index pushed higher in four of five sessions this past week finishing 2.42% higher. The index has risen in 120 of 202 sessions this year.
The S&P 500 officially recovered from the significant drop as Thursday closed at a new all-time high. The index recovered from this drop very quickly as it reached this new high by pushing higher in six of seven sessions since the Oct 8 low.
As expected last week the S&P 500 13 DMA for volume began to rebound. Although Monday’s volume was very low, probably due to disappointment that Congress had not come to an agreement over the weekend, by Wednesday volumes began exceeding this year’s daily average on the S&P500 and continued this trend, with Friday’s volume being the highest seen on the index in nearly a month. The 13 DMA increased 2.57% over that of the previous week’s finish. The last three trading days of the week finished with volumes 12.76% higher than the previous ten. If these volumes continue it could indicate that some of the cash is being moved off the sidelines.
Major Stock Market Indexes
The major indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000 continued very bullish rebounds.
All except the Dow Jones reached new 52 week highs, with all four of the other indexes finishing Friday at these new highs. These highs were also all-time highs on the S&P 500 and Russell 2000. The New York Stock Exchange finished at the highest levels seen in six years and is only 3.17% below an all-time high. The NASDAQ finished at levels not seen since Sept 2000. Although the Dow failed to reach a new high, it finished the week only 1.80% lower than the all-time highest close.
Although the Dow Jones has lagged in this rebound, the chart is showing some bullishness. It has closed seven straight sessions above the 13 EMA and five of the last six above the 50 EMA. The 13 EMA is nearing a bullish cross above the 50 EMA. It has also finished six of the past eight sessions higher. Even though it continued to fall until Oct 8, it has held downturns to two consecutive days or less since Sept 26. Part of the Dow’s problem has been the highly priced stocks that have taken large falls recently and not rebounded like Chevron (CHV), Exxon Mobile (XOM), and International Business Machines (IBM). These high priced stocks drag the price down on the index more drastically than lower price stocks with equal percentage drops and as a result the lower priced stocks must rebound much higher to make up for these losses.
The other index charts look very similar and very bullish. All are seeing the 13 EMA curl higher and widen the gap above the 50 EMA, which is also curling higher. All have pushed higher in six of the past seven sessions. All have spent these seven sessions above both the 13 and 50 EMA after rebounding back above these levels. All recovered from recent drops much faster than it took to fall and all are overbought.
The indexes and majority of stocks have become fully overbought so a short round of profit taking would not be a surprise; however it seems possible that they could begin to hold in or near these overbought levels again. It seems possible the indexes could continue higher in the week ahead.
US Treasury Charts
The price on the 20 year US Treasury Note dipped a little lower Monday and Tuesday before blipping higher during the final three days of the week. This move higher into the end of the week was during a worldwide stock rally, which normally causes a selloff in US Treasuries. The move was slightly higher than the previous high and began from a higher low, giving this rebound a bullish appearance. However, this move probably completed the stall pattern and it seems fairly likely the price could deteriorate in the week ahead. It seems possible this drop could fracture the minor support, and fall deeper than it did earlier. This rebound probably offers a good opportunity to unwind any positions bought into the dip stocks took earlier.
The 10 year US Treasury Note interest rate chart continued higher into the early week but began a turn lower on Wednesday that lasted through the remainder of the week. The downturn started from a lower high and fell to a lower low giving a bearish appearance. Again this probably completed the stall pattern, and it seems possible the interest rate on the 10 year could rebound in the week ahead.
The apparent bullishness in the US Treasury price charts is generally somewhat bearish for stocks; however it seems fairly likely that Treasury prices are near a turning point lower again. If they begin to fall here they will likely fall through earlier support and move to the lower trend line in the drop from the July 2012 high.
Gold’s retreat leveled off Monday and then began to slowly rebound holding near the 1280 level through the day Wednesday. It rebounded fairly strongly Thursday and then tapered lower Friday. The support at 1280 appears to have survived this retest, but a fall through it again could start a tumble lower as this support level could begin to turn into resistance. The New York close Friday of 1317.40 was higher than the previous week’s close of 1273.20.
S&P 500 Constituent Charts
Most of the constituents have seen very bullish rebounds since turning higher. As a result most are reaching or near overbought levels.
Many of the constituents continue to push through wedges, breaking resistance and moving higher. As these breaks occur, others move into these triangle patterns forming wedges against resistances. The constituents also continue to break above long term resistances. The numbers of resistance breaks seen recently makes a continued move higher seem likely.
Overall earnings reports during the past week were rather good. Most misses were small while many that beat did so with fairly wide margins. We have seen some upsets, as some constituents missed earnings estimates slightly, or beat soundly but guided lower, and as a result fell deeply in the past week. Many of these falls look overdone and it seems likely they could rebound fully from these drops.
The rebound has brought 141 of the constituents within 1% of 52 week highs, with three finishing Friday at new 52 week highs. A look at the long term charts of many of these companies shows what three or more straight years of increasing record earnings should do to stock prices; they have been in very steep climbs during most of that time. Yet quite a few of these stocks have not yet reached all-time highs and three of them are trading with trailing twelve month (TTM) P/E’s below 10 and eight have next full year forward (FYF) P/E’s below 10.
Most of the constituents have reached overbought levels, so a round of profit taking might be near. It seems possible many could begin or continue to hold in or near these overbought levels. Increases in volume could point to as increased presence of “sideline cash” entering equities, and if this increase in volume continues stock prices have the potential to increase much higher.
The +9 Day, 90 E, +2% L, -2% H, 100 L, +/(-) 90 D, +10 D and MRL indicators are currently active. The +9 Day and +10 D will expire in the coming week. It is likely the 100 L will become fully dormant on Monday. A 10 E will become active on Wednesday. See a more detailed description of the indicators developed through research here.
Several indicators became active recently and generally an increase in active indicators shows an increasing chance of volatility, however several will become inactive in the week ahead, showing a reducing likelihood of volatility. The index rebounded at a volatile level during the initial rebound, however most other indicators suggest that volatility could remain calm.
The +9 day indicator that became active on June 18, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.
+5.61% / -4.77% / +5.61%
The +9 day indicator will expire at Thursday’s close.
Friday’s close was 5.38% higher than the Oct 8 low and has reached a significant level. The Oct 8 low was one day after the 90E became active, and therefore this indicator has pointed to another significant direction change.
During the past week the +2% L indicator did not provide a correct indication. Provided there are no more volatile moves on the index, this indicator will toggle off with the 90E.
During the past week the -2% H indicator did not provide a correct indication. Provided there are no further volatile moves on the index, this indicator will drop to a low (L) likelihood in 4 trading days and remain in a low state for 20 trading days. If there are no volatile moves during that period, this indicator will become dormant. It seems fairly likely this indicator could expire without providing a correct indication.
The 100 L indicator remains active even though the index has recovered from the significant drop and moved well above the upper bandwidth of this resistance. It is fairly likely this indicator is dormant, however as explained in earlier articles there would be changes to the way resistance levels would be handled when there are conflicting resistances. One of these changes will likely require that there be three consecutive closes above the upper bandwidth of resistance levels. This is likely to happen with Monday’s close although it seems likely the 100 L is already dormant since it has moved over 1% above the upper bandwidth and fully into the conflicting resistance level.
The 90 D indicator that became activate on Oct 7, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.
+4.08% / -1.23% / +4.08%
The +10 D will expire at Wednesday’s close and at that time a 10E will become active. The 10E shows there is a high likelihood that the rebound seen during the +10 D will probably continue for another ten trading days.
The rebound has carried the index nearly through the first midrange resistance level (MRL) with this resistance most likely to be seen from 1735 to 1745 but it is possible the resistance level could continue to 1750. It seems possible the long period of turbulence seen within the 100 L probably reduced the resistance at this level drastically. The long period taken to breakdown the resistance at the 100 L also carried the index into the beginning of a more bullish timeframe. Therefore it seems possible this rebound could continue unhindered or with little more than a slowdown at this level. However if a pullback were to occur from within this resistance’s influence, it would be credited to this MRL even if the 100 L remains active.
Congress came to an agreement to delay an agreement. Although it shows they are serious about not allowing a debt default, it also sets another deadline in the not so distant future. Given their inability to come to an agreement until the eleventh hour in every crisis prior to this, it seems possible we could yet again see this deadline near without an agreement.
Although the 100 L remains active, it appears to have been broken and is already likely dormant.
The index has finally reached the first of two likely midrange resistance levels. With this resistance most likely be seen between 1735 and 1745 but could possibly reach to 1750. The long delay and triple significant drops seen within the 100 L probably reduced the resistance at this level drastically, further it is likely the pullback that was originally thought would happen within this MRL, happened within the 100 L. The long delay at the 100 L also brought the index into a timeframe that is less likely to see a significant drop. Although the recent rebound in treasury prices looks close to ending a stall pattern, and it seems fairly likely the rebound could fail, it is currently somewhat bearish on this resistance level. Most other indicators tend to point to continued bullishness. Currently the data would suggest this resistance could cause a slowing, but could be broken without incidence.
Volume levels continued to rebound with stock prices, exceeding the daily averages seen on the index this year beginning on Wednesday. If these volume levels continue to hold up, it could mean the large cash reserves are beginning to filter their way into equities. If this happens it does not seem unlikely volumes could remain at these elevated levels into and through what has been come to be known as the Santa Claus Rally.
Recently there was an increase in active indicators which generally shows an increasing chance of volatility with times of increased volatility generally bearish. However, the indicators seem to suggest a more bullish stance. This increase in indicators was met with a volatile move, but that move was higher on Oct 10. This volatile move higher in the early rebound off lows is often bullish. It was the first volatile move higher seen since Jan 2, which preceded a long bullish push higher on the indexes that ended with a significant pullback from the May 20 high.
In the coming weeks we will begin to see many of these indicators deactivate, indicating a reduced chance of volatility with reduced chances of volatility generally bullish. Most of the other indicators continue to suggest that volatility could remain low which is also generally bullish. Although all three of the recent significant pullbacks occurred into similar reductions in active indicators this was not normal and each drop appears to have been aided by news related events. Yet all three of these significant drops did so under low volatility, with only a single volatile move lower seen during the period beginning with the May 20 high and ending with the Oct 8 low, that being a June 20 drop of 2.50%.
The second midrange resistance level will likely be seen between 1760 and 1770. It continues to seem possible this resistance level could hold significant resistance, although if a drop is seen within this level, it seems possible that it might not quite reach the 3% level required for a significant drop. Not all data needed is available to fully investigate this resistance level at this time; any projections made prior to this data being complete are preliminary and could change over time.
There continues to be many reasons to be bullish at the current time. Any pullbacks in stock prices seen along the way are probably a good opportunity to add.
Many claim that stocks are overpriced. Some probably are, but it appears most aren’t, here is why. The earnings data is based on an update completed on Oct 11, and the price data used was downloaded after the market close on Oct 18 in the data used below.
First let’s take a look at some of the highest P/E stocks in the 141 that are less than 1% from 52 week highs
Amazon (AMZN) has a TTM P/E of -1430. They closed Friday at $328.93 and have a TTM operating loss of ($0.23). Netflix (NTFX) has a TTM P/E of 416.88. It closed Friday at $333.50 and has a TTM operating earnings of $0.80. These stocks look too far ahead. Based on their past performance, these stocks are probably trading ten or more years ahead of earnings growth, but due to their own ineptitude, might never reach this potential as others take market share from them. Both have been slow to capitalize on their unique market positions allowing the competition to gain an edge and have made completely boneheaded decisions that have erased a great deal of progress.
WPX Energy (WPX) has a TTM P/E of -25.20 closed Friday at $22.52 and has a TTM operating loss of ($0.90). The Williams Companies Inc. (WMB) spinoff is beginning to look like a spinoff designed to eliminate operating losses in the parent company. WPX is a member of the Energy sector which Al Gore says is in a “Carbon Fuel Bubble.” As these articles have pointed out numerously, investors appear oblivious to the facts in that sector, although recent price slides in some of the large players in this sector could point to the beginning of the walk up call.
Salesforce.com (CRM) has a TTM P/E of 135 closed Friday at $54.10 and has a TTM operating earnings of $0.40. Although this company is trading at a high P/E, it has demonstrated earnings growth that makes it look like it is trading less than five years forward; they also appear to have made business decisions that give it the potential to outperform this projection. This stock appears to be trading a little hot, but probably not quite as high as the P/E would indicate.
All of the rest are trading with TTM P/E’s below 60 and FYF P/E’s below 40. There are 31 trading with TTM P/E’s below 15 and 55 with FYF P/E’s below 15, but most of these 141 have beat earnings projections fairly consistently over the past three or more years so the forward projections have the potential to be low. Most of them have also been reporting record earnings.
The following excludes the 10 remaining energy sector stocks within this sample; some are trading at “reasonable” P/E’s as long as the “Carbon Bubble” does not pop, while others are not. As demonstrated in past articles, the earnings projections in this sector tend to be too high.
Although it could be argued that several of the remaining companies are overpriced, many are growth companies that are probably trading less than three years ahead of earnings growth (based on a P/E of 15). Although the current prices on these stocks add some risk, they probably aren’t overpriced for long term investors. They have demonstrated past earnings growth that makes this added risk acceptable for most long term investors. Given favorable market conditions, most will probably outperform these expectations. If reported earnings continue to beat estimates as they have in the past, over half of the 141 probably have FYF’s below 15.
Those are the top performers; here is how constituents look overall (including the energy sector).
There are 11 constituents that have operating losses in the TTM, but only three are expected to continue to report FYF losses.
There are 26 constituents with TTM P/E’s below 10 and 34 with FYF P/E’s below 10.
There are 140 constituents with TTM P/E’s below 15 and 221 with FYF P/E’s below 15.
There are 176 constituents with TTM P/E’s above 20 and 82 with FYF P/E’s above 20.
There are 13 constituents with TTM P/E’s above 50 and 6 with FYF P/E’s above 50.
There are 4 constituents with TTM P/E’s above 100 and 3 with FYF P/E’s above 100.
Based on data discussed in the Historical P/E article I argued that historical P/E’s are not practice when looking at the S&P 500 today since many of these historical P/E’s where based on timeframes that the S&P 500 did not exist, and used the S&P 90 as a basis for many of the years of this data. I have continued this research and feel even more strongly that many of the historical P/E’s used today are flawed and are much lower than the real historical averages.
The base period for conversion of S&P 500 data from the S&P 90 was set at 1941-1943 = 10. This conversion was not based on mathematical evaluation, but because, “It looked good,” and it was “close” to intersecting two arbitrary points in time. On December 31, 1956 the average price per common share was $49.12, while the formula valued the Index at 46.67.
The problem is it devalued stocks prior to 1957 by at least 5.25% but probably more as this just intersected two points in time and did not consider any others. As a result, all P/E’s prior to 1957 that use the S&P 500 as a basis are at least 5.25% too low. To make matters worse, many consider actual unadjusted data as “too high” and discard it because it doesn’t match the adjusted historical data which is actually too low.
Shiller’s S&P 500 data goes back to May 1871 and gives an average P/E of 15.5. Prior to the actual data, the index spends about 50% of its time below the mean. But beginning on March 4, 1957 the birthday of the actual S&P 500, it suddenly spends only about 25% of the time below the 15.5 value and it now averages above 22. Why the big change?
Aside from the P/E being at least 5.25% too low due to conversion to the S&P 90, the stocks in the S&P 90 were the “Blue Chips” of that time; they were generally the older more established companies that were no longer considered growth companies. As is the case with most of the Blue Chips of today, they were larger well established comapanies that paid higher dividends, but generally had lower P/E’s than the growth companies of that time.
When the S&P expanded to 500 companies, most of those that were added were growth companies. To illustrate this point in that P/E article a comparison of the 90 highest and lowest TTM P/E’s in the index was made. Let’s take an even more detailed look at the 90 lowest and 90 highest TTM P/E’s in the index.
The 11 stocks that have negative TTM earnings were omitted in this comparison. Although based on market cap, none would have likely made it into the S&P 90, they were omitted so these negative earnings would not weigh down the highest 90 P/E’s. Much like the results of those that intentionally omitted data discussed in the earlier article to reduce the P/E, these results were intentionally adjusted lower, and it probably skewed the data somewhat, but it still clearly shows the differences without the argument that the 11 with negative earnings were the only reason these P/E’s were so high.
First let’s take a look at the market caps of these two. The outstanding share data was not updated for this comparison, but is relatively current.
Based on Friday’s closing prices, the S&P 500 has a market cap of about $16.30 trillion. The highest 90 P/E’s have a market cap of about $2.65 trillion or 16.26% of the index value and the lowest 90 P/E’s have a market cap of about $4.14 trillion or about 25.40% of the index value. The lower market cap in the high P/E stocks is consistent with growth companies. The higher market cap in the low P/E stocks is consistent with Blue Chip companies.
Now let’s look at the dividend data.
There are 85 constituents that do not pay a dividend in the index, 33 of these stocks are within the highest 90 P/E’s and five in the lowest 90 P/E’s. Four of the 33 that do not pay a dividend in the highest P/E’s have paid a dividend at some time in their history, while three of the five in the lowest P/E’s have paid a dividend at some time in their history. The lower percentage of dividend payers in the high P/E stocks is consistent with growth companies. The higher percentage of dividend payers in the low P/E stocks is consistent with Blue Chip companies.
The average dividend yield on the index is 1.45%. The highest 90 P/E’s have a dividend yield of 0.67% and the lowest 90 P/E’s have a dividend yield of 2.71%. Again this is consistent with the growth and Blue Chip correlation between the two portions.
Finally, let’s look at the P/E ratios.
The 90 lowest TTM P/E’s range from 6.33 to 13.07 and include nine of the Dow Jones Industrial components along with one recently replaced: Hewlett Packard (HPQ) which happens to hold the lowest TTM P/E in the index. The 90 highest TTM P/E’s in the index range from 24.33 to 416.88 and includes two of the Dow components, both recently added: Nike (NKE) and Visa (V). This too is consistent with lower P/E stocks being Blue Chips, and higher P/E stocks being growth stocks.
It also appears to further illustrate the mistake McGraw-Hill Financial (MHFI) made when changing the Dow Jones, it is supposed to be a Blue Chip index, not a growth index. It seems possible this change compromised that index’s integrity.
The un-weighted average TTM P/E of the index is 19.04. If you are looking at the historical averages that are widely published and have been manipulated lower, this sends up a red flag that stock prices are too high. When you consider that the 90 lowest P/E’s average 10.61, the highest 90 P/E’s average 44.26 and that the remaining 410 including the 11 that have negative TTM earnings is 16.46, you could come to the conclusion that some stocks are overpriced. Stocks also generally trade about 12 months forward on earnings, and the FYF P/E (currently averaging about 14.5 months forward) of the S&P 500 is 16.27.
If you consider the P/E of about 22 taken from only the actual unadjusted data of the S&P 500, then this P/E is not too high.
The weighted operating earnings TTM P/E is about 16.99, and the weighted twelve month forward is about 14.27 based on data from the Standard and Poors website. The weighted “as reported” earnings TTM P/E is about 18.34 and the twelve month forward is about 16.01 also based on data from the Standard and Poors website. The un-weighted “as reported” earnings TTM P/E is 19.89 as of Friday’s close according to Robert Shiller’s S&P 500 P/E.
I ran this test with S&P data I have collected since 2003 although some of this data is not as complete as the data I keep today. The results are very similar in most market conditions with the exception of the lows during market crashes, where the Blue Chips tend to hold value and earnings better than the growth stocks and move more towards the middle of the pack.
So are stocks overpriced? It is a matter of opinion, but the data I keep tends to show most stocks are still underpriced and many are deeply underpriced, even using the historical averages most seem to embrace. There are a growing number reaching even value but as long as earnings continue higher, the price can continue higher without pushing these stocks overvalue. Growth stocks also generally trade at higher P/E ratios.
Many of these sources of information were used in this article.
Subscribe to receive Email alerts for new articles as they are published near the top or bottom of this page.
Have a great day trading,
All of my past articles can be accessed here.
Disclosure: I have investments in HPQ and MHFI. I do not have investments in CHV, XOM, IBM, AMZN, NTFX, WPX, WMB, CRM, NKE of V. I am currently about 89% invested long in stocks in my trading accounts. The increase in my investment level was due to the purchase of one issue with the cost of this purchase partial offset by the sale of one issue and dividend payments. I consider myself slightly oversold at the current time; however I have and will continue to sell stocks that reach long or short term targets. I will also continue to add stocks I feel are at a great value through a variety of buy orders. I will receive dividend payments from six issues in the coming week and 13 in the following week. If I make no further investment changes during this timeframe these dividend payments will reduce my investment level.
Due to changes in the reorg fee structure in my trading accounts, I may begin to consolidate positions somewhat to reduce the potential risks of occurring these fees. To this point my broker has waived most of the reorg fees I have incurred, but it takes time I just don’t have to get these fees waived. As a result, it might be easier to adjust my accounts to avoid these fees.
It is also likely I will begin selling positions that I know will incur these charges, as the trading fee is much less than the reorg fee. This was the case in the past week as I sold a position I had just begun building prior to the company being sold shortly afterwards. This stock is not likely to trade much higher, as I sold it slightly above the sales price, and it will likely take months for the deal to complete. This being the case, I feel there is a greater potential for gains elsewhere.
These fee structure changes have begun to limit my trading as I have passed up several opportunities to add companies that I would like to invest in during the recent downturn but did not already have positions in. I also hesitated to try to add to positions I have recently begun building positions in. Unfortunately, these strategy changes do not fit either my long or short term goals.
Although I could change brokers and it would likely result in reduced fees overall, I like my current broker and I have been with this broker for a very long time. Over the years I have pointed many that asked to this broker. They have given me little to complain about until now, unlike several others I have used in the past. Then again, one of those I stopped using in the past was because of an increase in this very same fee and one of the reasons I ultimately picked my current broker and transferred all other accounts to them was they did not charge reorg fees.
As with any investment, fee costs are one of the largest reasons for reduced gains. Over the long haul, a small reduction in fees will result in a large increase in gains. It is one of the reasons I avoid Mutual Funds where ever I can, as the fees their charge, however small, reduce gains. As a ploy to prevent frequent trading, they pointed to these trades increasing the fees they charge, yet none I used at that time reduced their fee structure after limiting frequent trading. In many cases, the fee percentage they charged increased the following year, probably due to reduced overall participation in their funds.
As is often the case, fee structure changes that are not thought out properly often cause a reduction in overall profits. Look at the fiasco Netflix (NFLX) caused when they raised fees a short time ago, profits plummeted.
Disclaimer: What I provide in the Stock Market Preview is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intended to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the stock market will do. If the stock market performs as I expect, it only means I am applying the stock market history to the current conditions correctly. My perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.