Monday, December 2, 2013

Shiller Warns of Stock Market Bubble…ISM Manufacturing Up

NOBEL PRIZE ECONOMIST WARNS OF STOCK MARKET BUBBLE (Reuters)
"An American who won this year's Nobel Prize for economics believes sharp rises in equity and property prices could lead to a dangerous financial bubble and may end badly, he told a German magazine…Robert Shiller, who won the esteemed award with two other Americans for research into market prices and asset bubbles…"I am not yet sounding the alarm. But in many countries stock exchanges are at a high level…"That could end badly," he said. "I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," he said, describing the financial and technology sectors as overvalued.”  Story at…
http://www.reuters.com/article/2013/12/01/us-economy-shiller-idUSBRE9B009620131201?feedType=RSS&feedName=businessNews

Just the facts Ma’am…

FACTSET EARNINGS INSIGHT – EXCERPTS (Factset)
Good Earnings/So-so Revenues/Terrible Guidance/above Average PE:
Earnings:  “With 99% of the companies in the S&P 500 reporting actual results, the percentage of companies reporting earnings above estimates is equal to the four-year average, while the percentage of companies reporting revenue above estimates is below the four-year average.”

"In aggregate, companies are reporting earnings that are 1.7% above expectations. Over the last four quarters on average, actual earnings have surpassed estimates by 3.7%. Over the past four years on average, actual earnings have surpassed estimates by 6.5%. If 1.7% is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q4 2008 (-62%)." [Keep in mind that analysts lowered earnings expectations for this quarter nso the miss is significant.]

Sales: "The percentage of companies beating sales estimates is above the percentage recorded over the last four quarters (48%), but below the average over the previous four years (59%)."

Guidance: “At this stage of Q3 2013 earnings season, 103 companies in the index have issued EPS guidance for the fourth quarter. Of these 103 companies, 91 have issued negative EPS guidance and 12 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 88% (91 out of 103). This percentage is well above the 5-year average of 63%.” 

PE: [The] "Forward P/E Ratio is 15.1, above the 10-Year Average (14.0)"
Full report at…
http://www.factset.com/websitefiles/PDFs/earningsinsight?b_start:int=100

Tired of reading Bear stories?  Here are more optimistic views:

BULL MARKET SHOWS NO SIGN OF DEATH WITH YELLEN SUPPORT (Bloomberg)
“Five years into a rally that has restored $14 trillion to share prices, U.S. payrolls remain 1.5 million below the level in 2008, according to data compiled by Bloomberg. Resistance to hiring…will help push Standard & Poor’s 500 Index profit margins above 10 percent next year, the highest ever, data show. Below-average employment was cited last month by Federal Reserve chairman nominee Janet Yellen as the biggest obstacle to raising interest rates…”American companies have been able to resize their balance sheets, to slim down their costs, and that has proven fairly favorable when we started to see some strong top-line growth,” Ilario Di Bon, who helps oversee $7.6 billion as head of equities at Alliance Trust in London, said in a phone interview. “Yellen has said, ‘let’s make sure that policy remains accommodative for a longer rather than shorter period of time to give the real economy time to adjust.’ I would expect 2014 to be favorable to equities.”
http://www.bloomberg.com/news/2013-12-02/bull-market-shows-no-sign-of-death-with-yellen-support.html

ISM MANUFACTURING INDEX HITS 2-YR HIGH (Marketwatch)
“The Institute for Supply Management’s manufacturing index climbed to 57.3% from 56.4% in October, reaching the highest level since April 2011...The upbeat data seemed to move bond prices, as the 10-year note rose to 2.79%. Yields move in the opposite direction to prices….“We think these data take the FOMC one large step closer to announcing a tapering in the pace of bond purchases at the December meeting although a final call on this will have to await the November jobs report on Friday,” said analysts at RDQ Economics in a note to clients.” Full story at…
http://www.marketwatch.com/story/ism-manufacturing-index-hits-more-than-2-year-high-2013-12-02?siteid=yhoof2

MARKET REPORT
Monday, the S&P was down about 0.3% to 1801 (rounded).
VIX was up 4% to 14.23. 

All of the loss occurred late in the day Monday and that repeats a pattern that has been going on for about 10-trading sessions.  This “smart money indicator,” so named because the pros are buying or selling late in the day, is suggesting a selloff is coming.  I have only collected about a year of data on this indicator since I’ve never found a source where I can download this data easily, so I am not convinced that the indicator is worthy of its reputation as a reliable indicator.  (Downloading a day at a time is too tedious.)

If I had significant profits for 2013, I’d try to carry them over to 2014 rather than selling in December.  That works to put off the taxes unless the market starts to pull back in December.  If it does, I’d be inclined to sell in December to lock in profits rather than take a chance losing my gains.  I am not suggesting this as a strategy, but rather, I think the markets could see a bigger pullback than most expect if we do see the market decline. But of course, with QE still full-on, corrections have been non-existent.

MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing fell to 49% at the close Monday.  (A number below 50% for the 10-day average is generally bad news for the market.) 

New-highs outpaced new-lows Monday, leaving the spread (new-hi minus new-low) at +81 (it was +194 Friday).  The 10-day moving average of change in the spread was minus 13.  In other words over the last 10-days, on average, the spread has decreased by 13 each day.

This trend following indicator is negative on the market in the short term.


 
 
 
Market Internals are a decent trend-following analysis of current market action, but in 2013 (so far), if I had been buying the positive ratings and selling negative ratings I would have under-performed a buy-and-hold strategy.

NTSM ANALYSIS
SENTIMENT remains EXTREME negative at 74%-bulls for the 5-day indicator.  (Three out of four investors in Rydex/Guggenheim funds I track are betting long.)  Overall, NTSM is neutral.

I saw a crawl on CNBC that said the current bearish sentiment equaled the bearish sentiment at the bottom of the crash in March of 2009.  (I was at the “Y” and the sound was off.)  I haven’t a clue what that was about.  I track %-bulls, but that is just: 100%-%Bears=%Bulls.

My data for %-bulls shows:
%-Bulls was 0.15% (6-bulls for every 40-investors) in March 2009 at the bottom vs. the current reading of 75%-bulls (30-Bulls for every 40-investors.)  Perhaps they meant the %-Bears was now equal to the top before the Financial crash.  Regardless, currently, sentiment suggest a correction greater than 10%, but that indicator is not a good timing indicator since sentiment can remain elevated for some time (as we have seen).

 

 
 
(I am mostly out of the market already.)

MY INVESTED POSITION (NO CHANGE)
I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am now under-performing my own system by about 6%!)  I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.

I still lean toward getting back in, after a pullback, to speculate on a final ride to the top.  NTSM did give several buy signals over the weeks of 14 and 21 Oct, but the market just looks too frothy to rush back in…we’ll see if the market will pullback so I can join the insanity.  If not, cash is fine.