Here is the weekly chart through 10/18/13: SPX Weekly
The "dip" buying has whipsawed the market again to the upside this time with good breadth
and decent volume behind it. Short term, the SPX is getting near overbought at channel tops,
but there are no other extremes. I do have an intermediate sell signal in place as of early Aug.,
but the price momentum internals on which the signal is based have merely decayed modestly
instead dropping off sharply as normally happens. The large intermediate term overbought
in the SPX since May of this year has also simply been working off slowly with no damage
to the market.
Returning to the chart, the green horizontal line represents fair value for the SPX based on a
p/e of 16.5X normalized 2014 trend earnings of $91 per share for the index. The line is set at
1486 and the market, at 1744, is trading 17.4% above it. The premium primarily reflects the
fact that reported earnings are cyclically elevated and are coming in above the long term trend.
Investors are thus paying up now to play the cycle although the premium is hardly onerous
yet and is no doubt troubling few players at the moment.
The blue horizontal is set at 1700 with the SPX now above it. We have entered a period when
the market is trading above the top of its long term trend channel going back to the end of
WW 2. So, from the point of long term history, the SPX is starting to develop a small bit
of froth. We are not talking bubble here. Far from it. But, by the same token, it is wise to
realize that the SPX has crossed over into a high risk zone viewed over the long term.
(There is also arcane technical work which suggests the run from the 1125 area in 2011 is
complete at 1700 both price and time wise and that a period of either correction or
extended consolidation would provide the attractive symmetry to say that the first two legs
up for this cyclical bull market which started in early 2009 are in the books. This a very
interesting historical point but I would be the first to say that the market is at liberty to
override such neatness and precision.)
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!