Once again, the S&P500 crept up for the week, this time by 1.3%. Volume was extremely light; in fact, it was one of the lightest non-holiday shortened weeks of the year. So nobody was really buying into this rally with any convictions; otherwise volume would have been more robust. And volatility remained near multi-year lows, meaning that investors continue to maintain a “what me worry?” attitude toward risk in the US stock markets.
Technically, prices are extremely stretched. On both the daily and weekly resolutions, the S&P is above the upper Bollinger bands. MACD lines are well above the zero line and RSI is above 70. At this point—despite all the nagging concern including declining sales and stagnating profits—stock prices continue to rise because, well, stock prices seem to always be rising. So why not just join the ride?
In US macro news, ISM services slightly missed expectations, but only after being revised not once, but twice to make the miss a modest one. Construction spending suffered its biggest miss in 14 months. International trade badly missed expectations: this will hurt the GDP results in the current quarter. Productivity also fell much more than expected. Initial jobless claims also slightly missed. On the positive side, factory orders beat consensus estimates. ISM manufacturing also beat. The big news release of the week, the jobs report, was pretty much on target. New jobs created, average hourly earnings and the average workweek all basically met expectations. The unemployment rate fell slightly. But the labor force participation rate did not improve, and remained stuck at multi-decade lows.
Recently, Deutsche Bank and one of its top market analysts (David Bianco) released a simple analysis that compares the US market VIX, as a measure of complacency, to the US market P/E ratio, as a measure of valuation. Going back to 1990, they looked at this ratio of PE / VIX and searched for times when the ratio peaked, reasoning that a high PE relative to a low VIX would suggest that markets were in a dangerous condition and ripe of a serious correction.
They found that in the early 1990’s, this ratio hit 1.5 just before stocks entered a serious bear market. In 2000, before the dot-cum bust, this ratio hit 1.3. And in 2007, the ratio touched 1.5 just before the Global Financial Crisis got underway, leading to a 55% drop in the S&P by March 2009.
So where does this ratio stand today?
Answer: at 1.66, which is higher than it was at every other prior peak in this analysis!
The led Deutsche’s Bianco to conclude that this “sentiment measure has never been higher and is in an extreme ‘Mania’ phase. And his advice to all would-be stock investors: “wait for a better entry” point.
So it’s not just some ‘crazy’ bloggers hammering home the message that this is a dangerous time to buy stocks and to be fully invested in stocks, but it’s an established mainstream analyst from an established global bank who is now sounding the alarms.
Go ahead and ignore the bloggers, but ignore the warnings from Wall Street at your own risk.