This chart from MarketWatch shows the performance of Crude Oil WTI (NYM $/bbl) Front Month contract, updated as of June 7, 2020. Now let's review price, sentiment, and valuation for June 2020.
Price
Source: Advisor Perspectives, Moving Averages May Update
This month, Jill Mislinksi wrote the following at Advisor Perspectives:
All three S&P 500 MAs are signaling "invested" and three of five Ivy Portfolio ETFs — Vanguard FTSE All-World ex-US ETF (VEU), Vanguard REIT Index ETF (VNQ), and Invesco DB Commodity Index Tracking (DBC) — are signaling "cash".The big change from the last two months is VTI switched from "cash" to "invested" joining IEF, which has signaled "invested" since the end of November 2018. Last month I mententioned paying attention to the 5-month and 12-month simple moving averages for SPY (an ETF that tracks the S&P 500) to track the duration of this shock to the market. As of June 1, the 5-month simple moving average remains below the 12-month simple moving average using monthly data, which indicates there is still a bit of negative stress in the S&P 500 index.
Sentiment
Source: CNN Business Fear & Greed Index
This index started the month at "Neutral." On June 5, 2020 this index measured "Greed" --with a level of 66. One of the seven components of this index is "Put and Call Options." As of May 29, 2020 this component switched from "Greed" to "Extreme Greed" with the following description:
"During the last five trading days, volume in put options has lagged volume in call options by 54.71% as investors make bullish bets in their portfolios. This is among the lowest levels of put buying seen during the last two years, indicating extreme greed on the part of investors."I will discuss the VIX in the market perspective section below. Since early May, Citi's Panic/Euphoria model has been measuring "Euphoric." In general when investor sentiment is euphoric, expected returns are low. Conversely, when investors are panicking, expected returns are high. This recent "Euphoria" is picking up on three primary themes. First, investors feel they have no alternative than to buy stocks. Second, retail investors seem to have gotten excited about the chance to purchase stocks after the March selloff. Third, there's a strong feeling of "Don't Fight the Fed." Be careful jumping on the bullish, euphoric bandwagon at S&P 500 levels above 3100. There are a number of incoming fiscal cliffs. Additionally, if demand doesn't significantly increase, September and October will have another large wave of layoffs. Liz Ann Sonders highlighted the concept of income cliffs in this chart from Oxford Economics with a tweet June 4. It shows income cliffs occurring before August:
As you can see fiscal support boosted personal income in the United States temporarily and will have a relatively negative impact on incomes in the next couple months.
Valuation
Today's valuation graph speaks for itself. There are countless data points showing the US stock market is overvalued, this is one of the few that shows why investors are bullish on stocks even at expensive valuations.
Please click on chart to enlarge
Source: The Market Ear, May 21, 2020
PSV (Price, Sentiment, Valuation) Summary
Price action shows an "invested" signal for VTI and IEF and a "cash" signal for VNQ, VEU, and DBC. Sentiment, according to the CNN Business Fear & Greed Index, started the month at "Neutral" but as of this writing on Sunday, June 7 it is measuring "Greed." U.S. publicly traded stocks remain overvalued, with the main justification for purchasing stocks being that there is no alternative place to invest with bond yields so low.
Market Perspective
The response to COVID-19 in many countries seemed slow at first and then shocked us with a sudden stop to economic activity. Many investors expected this policy response to result in negative outcomes. Investors contemplated debt defaults, bankruptcies, high and lasting unemployment and global supply and demand shocks at levels only associated with depressions. As horrible as our economic imaginations might have been, the early reality is the speed and magnitude of monetary and fiscal responses from governments and central banks across the globe succeeded in giving our global economy time to recover and restart with more nuanced public health policies. The only way policy could have responded faster to this sudden downturn in economic activity is if policymakers enacted automatic triggers for social benefits using information such as the Sahm Rule (Planet Money Podcast for more on the Sahm Rule).
LPL Financial wrote on June 3, 2020: "From the S&P 500 Index peak on February 19 to the bear market lows March 23, stocks lost 33.9%. Now, 50 trading days later, stocks have gained 39.6%, for the largest 50-day rally since the S&P 500 moved to 500 stocks in 1957." Meanwhile on June 5, Charlie Bilello, the CEO and co-Founder of Compound Capital Advisors, wrote, "The 63% decline in volatility [VIX] over the past 10 weeks is the largest 10-week decline in history." Lower volatility and higher prices is a recipe for investors to scoop up stocks. As quickly as fear hit the market, greed came back with an equally quick response.
The range of outcomes from here is considerable. Stock prices are losing touch with reality, and the only justification for them as an investment is relative to low bond yields. This provides us a clue to what will ultimately pop the equity bubble, rising rates. In the meantime, if monetary and fiscal policies cannot keep propping up equity asset bubbles, this could lead us back to where our imaginations first started: A global demand shock leading to a deflationary spiral causing a recession, full of insolvencies, bankruptcies and unemployment. At the present time, concentrated wealth cannot trickle down fast enough.
Let's end with this quote, which is a classic, and I last highlighted it in the October 2018 Update:
“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” - Sir John TempletonAs 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.--------------------------------------------------
Here's what I've been reading, watching and listening to recently:
- The ‘biggest challenge’ won’t come until after a coronavirus vaccine is found (Politico)
- Why The Stock Market Could Be Poised For Another Plunge (Felder Report)
- Young investors pile into stocks, seeing ‘generational-buying moment’ instead of risk (CNBC)
- Millions of baby boomers are getting caught in the country’s broken retirement system (WaPo)
- Fight The Fed: An Investing Conversation With Jesse Felder (Hedgeye via YouTube)
- Disconnect the Dots: Main Street vs. Wall Street (Schwab)
- David Rosenberg on Emergency Policy Decisions (Podcast, Masters in Business)
- Global economy firmly in recession (Fidelity)
- The Civilian Labor Force, Unemployment Claims and the Business Cycle (Advisor Perspectives)
- Harvard's Reinhart And Rogoff Say This Time Really Is Different (Bloomberg via FA Magazine)
