Doug Short Blog at Advisor Perspectives
Looking at moving averages for the US markets as represented by the Vanguard Total Market ETF, VTI, the momentum trade is winning and telling us to stay invested in the US market. Of the five asset classes tracked via ETFs in the above graphic two are showing to stay invested: VTI and VEU. The remaining three ETFs VNQ, IEF, and DBC are currently trading below their moving averages and telling investors to avoid them. Of course moving averages should not be your only investment indicator. When we examine price action based on monthly returns we learn that we are entering a seasonally weak period for the market. The chart below from Bespoke Investment Group shows monthly returns in the market and reveals that the market is heading into the historically rough period of June, August and September. These are the three months where the market has averaged negative returns over the last twenty years.
CNN Money Fear and Greed Index continues to trade on the greedy side of neutral. Looking at sentiment data collected by Recognia the short-term sentiment data (2 to 6 weeks) is strong. The mid-term (6 weeks to 9 months) data is weak. Long-term (9 months to 2 years) sentiment data is neutral. When I review sentiment data VT looks better than SPY. As a reminder we want to be greedy when others are fearful and right now there is minimal fear in the market.
I felt like looking at valuation from a different perspective this month. The graph above shows us that this is the most expensive market from a Price to Sales ratio (reviewing data since 2002). Valuation data continues to flash a caution sign for long term investors. The biggest issue with valuation data is that it becomes the least important factor as we move closer to the end of bull markets, and significant market returns can happen as an expensive market becomes more expensive.
The S&P 500 is trading at or near all time highs. Price action is positive for owning stocks. The economy is accelerating, however the growth rates are not spectacular. Sentiment is a bit greedy. Valuation is still on the high side. There is little reason to feel overly excited about this market. When markets are boring it is the best time to follow your financial plan and make sure that you have addressed what you would do if the market started to decline. It is not the best time to plan for a hurricane when you are experiencing one or worse after a hurricane has passed over and ruined your house. It is smart to plan for a hurricane when the weather is calm. Let's end with this quote from Richard Clarita, managing director at PIMCO, (as quoted from the Washington Post).
"Our bottom line is markets are a bit too relaxed. They are priced, if not for perfection, certainly for a continued run of good luck."
As always, 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.