Tuesday, September 27, 2016

September 2016 Market Update

Now that we have the first U.S. Presidential debate behind us and we have worked through most of September (historically one of the worst months for the market), let's take a look at the S&P 500.
The S&P 500 chart turned extremely cautious in September 2015 when the simple moving average, using monthly charts, showed the 5-month average fell below the 12-month average. The market bottomed in February 2016 and the S&P 500 saw bullish confirmation in May 2016 when the 5-month simple moving average on the market increased above the 12- month average. So the price action remains positive, but what about valuation and sentiment?
The CNNMoney Fear & Greed Index registers this morning with a reading of fear. This measure has been decreasing since a peak in the spring of 2016.
Below is the Shiller PE ratio:
Valuation on the S&P 500 continues to flash a warning sign to investors. The Current P/E on the S&P 500 shows a level near 25, currently 24.99, which illustrates an overvalued market. Let’s review the Shiller PE Ratio that is reading 26.80 (long-term mean of 16.70, median 16.05). This also shows that the market is overvalued. So price action is positive, investor sentiment is growing more fearful, and valuation continues to give investors a warning sign. S&P 500 earnings peaked in 2014, this also creates a warning as the market usually follows earnings.
This backdrop leads me to a few questions: What is the upside for passive indexers from this level? Is 2200 the hard ceiling on this market? If the earnings recession continues, when will the growth slowing situation start to impact the market? I see limited upside on this market unless market conditions change. A 10% increase from 2160 on the S&P moves the market to 2376 and a 10% decrease takes the market to 1944. Friends, do you see this market breaking 2193 and ultimately closing above 2200 this year? Remember this is where we are in the market since 1971:
As long as momentum is able to supersede fundamentals we need to invest with what the market is giving us. We can look at moving averages again at the end of October to see if the momentum can continue, but remember that adding long-term money to this market is an expensive proposition. The main benefit of investing in this market remains that the dividend rate is currently higher than the yield on 10-year treasury bonds (unfortunately this benefit is little help if a correction hits the market). Wise investing my friends.
Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.