S&P500 Valuations Remain Obscenely High

The S&P500 jumped another 1.5% last week, but volume was very light so once again, buyer conviction was not all that strong. At the same time, S&P volatility plunged back down close to multi-year lows, where it was back in February of this year.

The technical picture is now showing some divergence between the daily and weekly resolutions.  On the daily charts, the S&P has broken to the upside. The recent, short-term downtrend has been broken and it now looks possible that the S&P could set new record highs, which were last set in February, when the VIX index bottomed. On the other hand, when looking at the S&P on the weekly charts, the breakdown that began in late February looks like it’s still in effect. Momentum, as measured by MACD, is waning and the MACD lines have crossed over into a bearish direction. Of course, if the S&P500 rises another week or two, then this bearish condition in the weekly charts will flip over to a bullish signal and match the daily charts. On the other hand, many technicians….when assessing a divergence between daily and weekly chart signals….tend to favor the longer-term weekly signal because it tends to be more accurate than the shorter-term daily signal.

US macro news was particularly negative last week. The Chicago Fed National Activity Index plunged. The Dallas Fed manufacturing survey missed expectations. Consumer confidence also missed. Durable goods orders, both headline and ex-autos, missed…..with the core reading missing very badly. Pending home sales missed. The Kansas City Fed manufacturing index plummeted. First quarter GDP came in lower than expected. The employment cost index rose more than predicted (this will hurt corporate profits). And consumer sentiment also missed. Only new home sales, international trade, and the Chicago PMI beat estimates. All in all, it seems that both hard and now soft measures of US economic health have started to deteriorate more in the recent month.

Finally, it’s worth noting that valuations in the S&P500 still remain obscenely high. Prices are just a fraction lower than they were at the all-time highs set only a couple of months ago. And extremely reliable measures, measures that have been valid over the last 100+ years of market history, are portraying a US stock market that’s extremely overvalued. How overvalued? Using price-to-sales and price-to-GDP (some of the most reliable metrics available), the S&P500 would need to fall by about 50% JUST to revert back to historical averages. If prices were to overshoot on the downside—which they almost always have done in bear market cycles over the last 100+ years—then the S&P500 would need to fall by about 75%. It sounds crazy, but that’s what history teaches us, and history has always been relevant in predicting and explaining future market outcomes.

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