Archive for the ‘Analysis’ Category

Intermediate Trend Status of All Stocks, ETFs and Mutual Funds (Feb.’17)

Wednesday, March 1st, 2017

Warren Buffet wisely said,

“Be fearful when others are greedy, and be greedy when others are fearful.”

Clearly, you should only be greedy for fundamentally “good” assets, which requires fundamental analysis as the first level of decision-making.

However, determining “when others are greedy” and “when others are fearful” is a matter of technical analysis, which is a good companion to fundamental asset selection and allocation.

Investors as a whole are most greedy at the top of an up trend, and most fearful at the bottom of a down trend.

To follow Buffet’s advice, you must choose between predicting the tops and bottoms of cycles (market timing), or measuring that a top or bottom has just occurred (trend following).

Trend following is the rational choice in our view.

  • Market Timing is based on unspecified or variable information and opinion inputs – it cannot be defined, automated and back-tested.
  • Trend Following is based only on price and volume behavior – it can be defined, automated and back-tested.
  • Market Timing is opinion; subjectively derived about what someone thinks the market ought to do next.
  • Trend Following is factual; objectively derived by observing what the market price and volume have done.

Diagram Mkt Timing versus Trend Following

The “QVM 4-Factor Trend Indicator” is an intermediate trend following method. It is meant to be a technical companion to fundamental asset selection and allocation.

A video explanation of the indicator methodology, including back-testing results with the S&P 500 and precursors from 1904  follows in this video.

It is reasonable to be in or overweight those securities in confirmed up trends; and to be out of or underweight those in confirmed down trends.

If you are considering certain securities for entry, it is reasonable to enter only in a confirmed up trend.

Why enter during a down trend, since you don’t know where the bottom is.  If those securities you intend to own are currently in a down trend, it is reasonable to wait for that down trend to change to a confirmed up trend before committing capital.

The principle value of trend following in practice is not outperforming in up markets, but rather outperforming in down markets (“winning by not losing”) — having a low capture ratio in down markets and a reasonable capture ratio in up markets.

Each month, we measure the intermediate trend status of thousands of listed stocks and ETFs, and over 1400 retail level mutual funds.

For February 2017, we measured the trend status for 8,020 securities.

  • 74% of both the S&P 100 and S&P 1500 stocks were in demonstrated up trends
  • 61% of the 6,578 listed securities were in demonstrated up trends.
  • 78% of the 1,442 mutual funds were in demonstrated up trends.

While this is a monthly subscription data service, the February data package is available to anyone without charge.  Download the full 2017-02-26 trend data spreadsheet here.


This article will show you the current trend status of key securities, but first, here is the structure of  what is in the data package.

Full Spreadsheet ColumnsView Annotated

Each tab in the spreadsheet has:

  • the overall trend determination, and the status of the 4 components of the measurement
  • a strength measure for the trend
  • the position of the price versus its trailing high and its trailing range
  • an Overbought and Oversold indicator
  • the price change over the past 3 months and 12 months
  • the average Dollars traded per minute for the security (except for mutual funds which have no volume data)
  • and links per security to multiple third-party information sources (Morningstar, Seeking Alpha, Yahoo, StockCharts, & BarChart)

This is what the trend data looks like:

This is what the other data looks like:info2This is what the third-party information links look like:


If you would like to inspect your portfolio holdings in terms of their intermediate-term trend condition, download the February data package.  The tab for the 1,442 mutual funds most likely has any fund you may own.  The tab for all listed securities with sufficient data (about 28 months of existence) will most likely have the vast majority of the listed securities you own.

CAUTION: Bond funds are included in the study, but the trend determinations may be less clear for them, as bonds do not tend to change direction as often or as dramatically as equities — and this methodology has not yet been back-tested for bonds.  Bond funds are included for completeness, but may not all be appropriate for such analysis.  Long-term and low quality bond funds are probably more appropriate for this method of analysis than short-term and high quality bonds funds.


Here are some of the data points that may be of general interest about the state of the markets:


All of the members of this group from Vanguard (the largest purveyor of target date funds) for retirement years 2015 – 2055 are in demonstrated up trends.

tgt date

Vanguard target date funds are composed of 5 funds in different allocations along a glide path — one fund each for:

  • US stocks,
  • International stocks,
  • Aggregate US bonds,
  • Short-term US Treasury inflation protected bonds,
  • Aggregate Dollar hedged international investment grade bonds


These and most US asset categories are in up trends.  Some are in or near overbought condition as the “Buying Pressure Level” column shows.

styles and sectors


More are in up trends than down trends. This list is of the country funds in up trends. Interesting to see that Argentina is in the second strongest trend, as measured by Buying Pressure Level.

countries up

This is the list of country funds in down trends.  Mexico is in that group, which may be partially a Trump effect.

Countries down

The other country funds are rated 50 either because they have weak trends, or because they are in transition from one direction to the other.


74% of S&P 100 stocks are in up trends.  Here are the 25 of those in the strongest up trends.  They are mostly all in or near overbought condition.



SP100 down


Most liquid ETFs (defined here as trading at least $15,000 per minute) are in up trends or rated 50 for a weak or transitional trend, but here is the complete list of those non-bond, non-levered, liquid ETFs that are in down trends.

LquidETFS down


The ETFs in this list represent commonly held asset categories in portfolios:

  • total US stocks
  • large-cap developed markets ex US stocks
  • large-cap emerging market stocks
  • US REITs
  • intermediate-term US Treasuries
  • short-term US Treasury inflation protected securities
  • US aggregate bonds
  • Dollar hedged investment grade international bonds
  • Dollar denominated sovereign emerging market bonds
  • gold bullion.

The David Swensen Portfolio components were referenced in his 2005 book, “Unconventional Success –  a Fundamental Approach to Personal Investment”.  The allocation he used (as updated in 2015 to 5% more emerging markets and 5% less REITs), was 30% US stocks 15% developed markets ex US stocks, 10% emerging markets stocks, 15% US REITs, 15% intermediate-term US Treasuries, and 15% US Treasury inflation protected securities.

He termed it a “reference portfolio” because it is merely a starting point for personalization based on goals, needs, circumstances, and the ability to stick with the portfolio over time.

Swensen is the long-time CIO of the Yale endowment.

2 simple portfolios

We hope you found this helpful and would be pleased to discuss with you how this methodology could be overlayed on your portfolio.  The monthly data subscription is $299 per year.


Intermediate-Term Technical Condition of Domestic & Int’l Stocks and Bonds

Tuesday, November 29th, 2016

There is more to consider than technical condition of markets and securities, but combining technical condition information with fundamental and macro-economic information makes for better decisions.

Let’s look at the intermediate technical condition of US large-cap stocks; EAFE (DM ex US large-cap stocks) and EM stocks; as well as Aggregate US bonds, DM Dollar hedged investment grade bonds, and EM Dollar denominated sovereign bonds.

We used SPY, VEA, VWO, BND, BNDX and VWOB to represent those major categories in Figure 1.



The red/yellow/green color coded scales in Figure 1 rate each category as trending UP or DOWN or in Transition.  If the category is in Transition, a horizontal arrow shows the direction of the Transition from Up to Down, or from Down to Up.  If the price has crossed the primary trend line in a direction opposite of the trend direction, the rating is noted with an “X”.

Figure 2 presents the 4 essentially non-overlapping monthly factors in the QVM trend indicator, along with how they are scored and summed to an overall rating. The indicator is a price-only indicator, which does not consider distributions, which are part of total return.


(click images to enlarge)


There are 9 possible configurations of the 2-month leading edge of the Major Trend.  Figure 3 presents those 9 configurations graphically and how each is scored by the indicator.



We use a custom built program to plot a running rating for each security, which is shown in black in the top panel of Figure 4.

The middle panel in blue is ancillary information showing the distance of the price from the 12-month trailing high.

The main panel contains the 4 factors:  Major Trend in gold; Price in black, Buying Pressure in green; and Parabolic Pace in dotted red.




In a more compact way, and for easier comparison between charts, we also look at charts from that contain essentially the same, but not exactly the same data (see Figure 5) — the difference being that dividend adjustments made by StockCharts sometimes cause ratings to differ somewhat when the technical condition is close to a change.  Most of the time, for practical purposes, the StockCharts plots are sufficient.  The StockCharts plots, however, cannot calculate or display the actual rating.



Figure 6 shows the tabular output of our software showing how each of the 4 factors is rated, along with the overall trend rating, with some additional information (Buying Pressure level, distance of the price from the 12-month trailing high, and the position of the price within the 1-year high-low range).



It is important to note that value and technical condition are not always aligned.

Figure 7 shows the Shiller price to 10-year average inflation adjusted GAAP earnings (“CAPE” for cyclically adjusted P/E), as it relates to the long-term median of that valuation multiple; and the expected 10-year return based on a potential decade-long mean reversion.

Bottom line, US large-cap stocks are in the best current trend condition, and are the most expensive, with the lowest return if valuation revert to the mean over the next 10 years.  Non-US DM stocks and EM stocks are in poor trend condition, and are significantly less expensive, with substantially higher next decade returns in the event of valuation mean reversion (see Figure 7).

Note that US large-cap stocks and DM stocks have similar expected volatility, whereas EM stocks have much higher expected volatility.



A more graphical way to look at the relative valuation of US large-cap stocks versus DM and EM stocks is in Figure 8, which shows the extremes of CAPE valuation, the range where the valuation is most of the time (in green), and the current valuation (black dot).  US large-caps are very expensive by this measure, and DM and EM stocks are inexpensive.



Figure 9 calculates the percentage price change that would be required today for a full mean reversion.  It is unlikely to make such a sudden full jump, but the percentages are another good way to see the disparities in valuation; and the theoretical price gain potential (before consideration of various political, macroeconomic and other factors).  It also shows the Morningstar provided 3-5 year earnings growth expectations, and our calculation of the PEG ratios using Morningstar data.



Figure 10 provides the current QVM 4 factor trend ratings for the 10 sectors of the S&P 500.

Figure 10:



These data suggest that for those with a patient, long-term view, a little less US stock and a little more DM and EM stock should prove beneficial; BUT that requires accumulating assets that are in price decline, or maintaining an above average cash position to wait for DM and/or EM stocks to change to an intermediate up trend.  Even then EM stocks will provide a bumpy ride.

The cash holding to wait for a turn in DM or EM stocks is reasonable, because there is a distinct possibility (not necessarily probability) that US stocks could be in decline as DM and EM stock are ascending, in which case emotions may prevent the reallocation, or the gains and losses could substantially cancel each other.

All that is really being suggested here is rebalancing within the investment policy allocation range for each key asset type;, or using cash as in intermediary step between decumulation of one asset and accumulation of another based on trend evaluation.

Those near or in retirement need to make sure that in addition to any such long-term positioning, they maintain sufficient safe, liquid assets to be able to make withdrawals for a few years out of assets that do not fluctuate much in price, in the event of an extended or major market decline. The most vulnerable years are the 5 years leading to and 5 years after beginning to rely on the portfolio to support lifestyle.

In terms of sectors, the trend condition reports the obvious, which is that REITs, Consumer Staples, and Utilities are struggling with pending interest rate increases — and therefore should probably be kept at the minimum of the investment policy range for each portfolio until the trends recover.

The securities used in these trend evaluations were:

  • SPY – US large-cap
  • VEA – DM non-US stocks
  • VWO – EM stocks
  • BND – US aggregate inv. grade bonds
  • BNDX – DM Dollar hedged inv. grade bonds
  • VWOB – EM Dollar denominated sovereign bonds
  • XLB – basic materials
  • XLE – energy
  • XLF – financials
  • VNQ – REITs
  • XLI – industrials
  • XLK – information technology
  • XLP – consumer staples
  • XLU – utilities
  • XLV – health care
  • XLY – consumer discretionary

We will publish a similar review of country ETFs in a future article.


Lowered Long-Term Portfolio Return Expectations: Mean Reversion Impact

Tuesday, August 9th, 2016

QVM Clients:

  • Current stock and bond trends are mostly up and S&P 1500 breadth indicators have normalized
  • S&P 500 is approximately at consensus 2016 price level
  • Mean reversion risk is substantial but timing of realization is unknown
  • Institutional long-term asset return assumptions are lower and portfolio return expectations should be tempered
  • Specific mean reversion risks presented in charts

The current trend is generally up, with non-US developed markets struggling, and emerging markets transitioning to clear up trend. Here are the trend ratings for ETFs representing key asset categories commonly found in portfolios. The ratings are based on the monthly four factor indicator used by QVM:

  • Direction of tip of 10-month moving average
  • Position of price above or below the 10-month moving average
  • Net buying or net selling pressure
  • Price position versus a progressive threshold changing at a geometric pace

As additional information, the table provides the price percent below the 12-month high price; the price position within the 12-month high-low range, the overbought or oversold condition based on the money flow indicators, the positive or negative signal from the MACD signal line, and whether the MACD is above or below the center line.

Even though current trends are up, the Bull is aged and probably in late stages, with significant long-term risk associated with eventual withdrawal of central bank market distortions. Cautiousness and conservatism is warranted.

(click on images to enlarge)


Fear of loss and risk avoidance are important emotional and behavioral factors that are about twice as strong as satisfaction with gains and opportunity seeking emotions and behavior. That gives us some pause talking about long-term risks. We do not want to frighten anybody or cause them to, as Jeff Gundlach said, “Sell Everything”. Market performance problems that are certain to be upon us someday are not upon us now, and within reason, we must take advantage of current positive trends. But we want you to be aware of the nature of the problems that will most certainly be realized some uncertain time in the future. There are important setups of valuations that are too far from long-term mean levels to be permanently sustained, and that are the basis of multiple institutions cautioning investors of subdued returns over the next decade.


In June a survey of institutional investment strategist saw the S&P 500 ending 2016 at around 2100 to 2200. We are pretty much there now, suggesting not a lot of upside over the remainder of the year, which also dovetails with the likely reluctance of investors to be fully exposed to market risk during this unusual presidential election.



We have been in the Great Distortion for years now, and “mean reversion” can gettcha if ya don’t look out. Unfortunately, while mean reversion is a near certainty, when reversion takes place is not. Wide deviations from “normal” levels can go on for long periods (but can also revert quickly). Our central bank and those of Europe, Japan and China have been doing things to prevent mean reversion for years now. Someday the forces of mean reversion will defeat the central banks if the banks don’t toss in the towel on their distorting efforts first.

Before a general look at overvaluation and mean reversion in the S&P 500, here from 720 Global is one of the worst cases today of yield chasing that has put utilities into rarefied territory with very strong mean reversion risk.

The image below shows the S&P 500 sector ETF (XLU) Price-to-Sales ratio is more than 3 standard deviations above its average since 1990; and the Price-to-EBITDA ratio is nearly 3 standard deviations above. Valuations 3 standard deviations from the mean have odds stacked well against them being sustainable.

The price would be cut in half to get back to average Price-to-Sales ratio, or cut by about one-third to get back to average Price-to-EBITDA. That is not an attractive risk for a slow-growing industry. This problem caused by the frantic search for yield that has raised the price of typically high yield or strong dividend growth companies to unattractive valuation levels.

The need eventually to move valuations back toward the mean levels in key asset categories is the reason so many forecasters see muted portfolio returns in coming years.

2016-08-08_02The current trends in US stocks, and bonds are up right now, which is itself unusual as a pair. They are all marching to the tune of ZIRP and NIRP (zero interest rate policy and negative interest rate policy), which cannot go on forever – a long-time yes, but not forever. When rates normalize (revert to mean), so too will stocks and bonds. Interest rates are at the base of most aspects of investing, and tend to drive valuation of other assets. Having some idea what normalization would be is important to setting expectations.

A wide variety of institutional voices have concluded and published their expectation of lower portfolio returns over the next several years, as a result of the significantly above normal returns of the past several years. They talk of interest rates rising, profit margins declining, revenue growth slowing or not accelerating, valuation multiples compressing, debt servicing costs rising, reduced stock buybacks resulting in less boost to earnings per share, and just general world GDP slowing or moderation.

Looking across their prognostications and generalizing, it seems they expect a 4% to 5% total return over the next 5 to 10 year for a 50/50 stock/bond balance portfolio.


McKINSEY & COMPANY (largest independent management consulting company)
In May of this year McKinsey & Company published a report titled “Diminishing Returns: Why Investors Need to Lower Expectations”. They see much lower asset returns, and therefore lower portfolio returns, in effect due to mean reversion.



Based on the mid-point of McKinsey’s view a 50/50 US stock/US bond portfolio would tend to return an approximate 5.25% nominal annual return over the next 20 years.

BLACKROCK (largest asset manager in the world – $4.5 trillion AUM)
BlackRock sees similar lower asset returns.


Based on BlackRock a 50/50 US stock/US bond portfolio should expect a long-term nominal annual return of about 2.55% over the next 5 years and about 3.5% over the “long-term” (undefined length of time).

VANGUARD (second largest money manager – $3.3 trillion AUM)
Vanguard had this to say last December with a less pessimism:

“Vanguard’s outlook for global stocks and bonds remains the most guarded since 2006, given fairly high equity valuations and the low-interest-rate environment …The growth outlook for developed markets, on the other hand, remains modest, but steady … our medium-run outlook for global equities remains guarded in the 6%–8% range. That said, our long-term outlook is not bearish …the high-growth “goldilocks” era enjoyed by many emerging markets over the past 15 years is over. Indeed, we anticipate “sustained fragility” … China’s investment slowdown represents the greatest downside risk.”

JOHN BOGLE (Founder of Vanguard Group)
6% nominal (non-inflation-adjusted) equity returns during the next decade; 3% bond return

Based on Vanguard’s view a 50/50 US stock/US bond portfolio would tend to generate a 4.5% annual nominal over the next 10 years.

STATE STREET GLOBAL ADVISORS (third largest money manager – $2.3 trillion AUM – sponsors of SPDRs including SPY)


Based on the State Street forecast a 50/50 US stock/US bond portfolio should expect an approximate annual nominal returns as follows over various time frames:

  • 1-year: 1.85%
  • 3-years: 3.60%
  • 5-years: 3.95%
  • 10-years: 4.4%
  • 30-years: 4.85%.

JP MORGAN ASSET MANAGEMENT (prominent high net worth, private wealth manager)

This is the long-term view from JP Morgan Asset Management as of their annual outlook for nominal returns over the a 10-15 year time frame:


Based on JP Morgan forecasts a 50/50 US stock/US bonds portfolio might expect an annual nominal return of 5.63% over the next 10-15 years.

NORTHERN TRUST (prominent high net worth private wealth manager)

“We expect developed market equity returns of 5.4% annually, bookended by emerging market returns of 7.3% at the top end, and US returns of just under 5% at the low end. … We expect real assets to perform relatively well, led by a forecasted return of nearly 7% for natural resources. .. We expect the US 10-year Treasury to support a yield of just 1.5% [over five years], capped by the German 10-year yield of just 0.5% and the Japanese 10-year at 0%. … We do expect an uptick in high-yield bond defaults, but project a 5% total return, which is attractive compared to the outlook for the equity markets. … While we expect to see some modest deterioration in corporate credit quality, continued low rates and strong investor demand should lead to further spread tightening for investment-grade bonds [that suggests continued gains as spreads to Treasuries compress]”

By interpolating/hypothesizing perhaps a 3% aggregate bond yield from Northern Trust comments, a 50/50 US stock/US bond portfolio may generate an annual return of about 4% over the next five years.

GOLDMAN SACKS (prominent high net worth private wealth manager)
Goldman Sachs “Last Innings” 5-year nominal return assumptions.


Based on Goldman Sachs forecasts, a 50/50 US stock/US bond portfolio (it’s a little hard to say because they do not specify US aggregate bonds or investment grade bonds), but let’s take the mid-point between their cash return and high yield return (2.5%) and tweak it up to 3%. That would give a possible 5-year expectation of about a 3% nominal portfolio return.

RESEARCH AFFILIATES (pioneer in “factor-based” investing)
1.1% real returns for U.S. large caps (the S&P 500) during the next 10 years; 1.1% real returns for the Barclays U.S. Aggregate Bond Index

Based on Research Affiliates forecasts a 50/50 US stock/ US bonds portfolio would generate about a 1.1% real return (perhaps 3% to 3.5% if inflation were to be in the range of 2% to 2.5%) over the next 10 years.


The 50/50 forecasts we estimate from the selection of institutions above are:

  • McKinsey 5.25% over 20 years
  • BlackRock 3.5% over the “long-term”
  • Vanguard 4.5% over 10 years
  • State Street 3.95% over 5 years
  • State Street 4.4% over 10 years
  • JP Morgan 5.6% over 10-15 years
  • Northern Trust 4% over 5 years
  • Goldman Sachs 3% over 5 years
  • Research Affiliates 3% to 3.5% over 10 years

Based on their range of thoughts, let’s go with 4% over 5 to 10 years and see how one might get there logically:

  • Stocks return 5% consisting of 2% dividend yield and 3% growth in earnings due to global GDP growth
  • Corporate bonds return 3% average interest, and no capital gains due to rising interest rates
  • 50% x 5% + 50% x 3% = 4% portfolio return.

A 70/30 stock/bond portfolio with the same underlying asset returns would return 4.4% (70% x 5% + 30% x 3%).
A 30/70 stock/bond portfolio would generate a 3.6% return (30% x 5% + 70% x 3%).

One way to potentially do better is to own stocks that pay more than 2% (index level) yield and that are not terribly interest rate sensitive, and that can grow earnings (and revenue) at least at 3% over the next 5-10 years – to get more of the return in regular cash with less reliance on price change.

Another way might be to overweight less popular stock categories, with more favorable valuation, with at least the potential to growth faster than US stocks, perhaps such as emerging markets

A third way could be to have a non-core tactical component of the portfolio that, if successful, could outperform the core.


In great part, long-term assumptions come down to reversion to the mean whether analyzing core portfolios, or tactical opportunities — so let’s look at some prime examples of assets far enough from their mean that significant value changes are in store, when the forces of Great Central Banks Distortion are withdrawn.

Before the mean reversion sets in, there needs to be some sort of catalyst. Central banks are expected to provide that catalyst in one way or the other, either by raising rates, or cutting rates with minimal intended effects. Another catalyst could be investor recognition of obvious problematic divergences.

Figure 1 shows an important problematic divergence.

The S&P 500 price is in black and its reported GAAP earnings are in red. Trailing earnings are falling and the price of the index is rising. That is a divergence setting up for a reversion to the mean (unless of course earnings catch up with the strong price rise). Note that the last two time earnings declined for several quarters, the stock index declined significantly as well. This is a cautionary signal.



Figure 2 shows a problematic divergence based on forward operating earnings similar to the one in Figure 1 which is based on trailing GAAP earnings.
S&P 500 forward operating earnings expectations are relatively flat, but the price of the index rising significantly, This divergence is not normal and sets up for a reversion to the mean (a return to a normal relationship). This is a cautionary signal.



Figure 3 shows that not just earnings, but also profit margins are in decline, and are also above their long-term average. This is a set up for return to the mean, which would be a negative for the S&P 500. If all other valuation factor remained constant, profits (and presumably prices) would come down 8.3% for profit margins to reach their 10-year average.



Here are some important comments about profits and mean reversion:

Warren Buffet (1999) CEO Berkshire Hathaway
“In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%.”

Jeremy Grantham (2006) CIO GMO (Grantham, Mayo, & van Otterloo)
“Profit margins are probably the most mean-reverting series in finance…”

John Hussman (2013) President Hussman Investment Trust
“In general, elevated profit margins are associated with weak profit growth over the following 4-year period. The historical norm for corporate profits is about 6% of GDP. The present level is … above that, and can be expected to be followed by a contraction in corporate profits over the coming 4-year period …”

Jason Zweig (2013) writes Wall Street Journal, Intelligent Investor column
“… regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”

Figure 4 shows aggregate public and private corporate profits as a percentage of GDP. There are way out of line with the norm. This is a setup for return to the mean, in a way that would reduce stock returns going forward. If all other valuation metrics remained constant, the value of American corporations would decline by 27% to reach the mean profits to GDP ratio.

Note the use of the 85th and 15th percentiles as indicator lines. When at the 85th percentile, there is 6 times more room below than above that level (5 times to the 15th percentile level); and at the 15th percentile, there is 6 times more space above than below (5 times to the 85th).



Price-to-earnings ratios are the most popular metric. Figure 5 shows the Shiller CAPE ratio (an inflation adjusted 10-year average reported GAAP P/E ratio). If all other valuation metrics remained constant, the price of the S&P 500 would have to decline by 33.6% for the CAPE to reach the mean.



Figure 6 shows the P/E ratio based on the 12-month trailing reported GAAP earnings. It too is way above normal and set for mean reversion. Such elevated P/E ratios may be justified in the short-term due to exceptionally low interest rates, but when rates eventually rise, as they must, the math used to set reasonable P/E ratios adjusts, and lower P/E multiples will be in order. Note that much of the increase in price in the past few years has been due to multiple expansion and not to underlying organic growth of the companies. When interest rates rise, some of those stock multiples must be given back.

To revert to the 25-year median, the S&P 500 would have to decline by 20% at the current earnings level. To revert to the 135-year median, the S&P 500 would have to decline by 40%.



Figure 7 shows the P/E based on forward operating earnings. Like the 10-year inflation adjusted GAAP P/E, and the 12-month trailing GAAP P/E, the forward operating earnings P/E is also well above its average. To revert to the 10-year average, the S&P 500 would have to decline by 16%.



Figure 8 provides a much longer view of the forward P/E ratio (courtesy of Dr. Ed Yardeni, Yardeni Research inc., Here he has plotted P/E isobars, representing what the index price would be at different P/E levels for the forward earnings view at the time. We added the color shading to make it a tad easier to see stages of valuation at different levels. This chart plots from 1979. You can see that the current forward P/E is in the elevated range (light orange) between P/E 15 and 20. That suggests mean reversion vulnerability.



Really it is easier to think of stock valuation relative to interest rates by expressing stock valuation as an earnings yield versus a Treasury bond yield (yield-to-yield, instead of P/E-to-yield). Earnings yield is simply the inverse of P/E. Instead of P/E it is E/P. Figure 9 shows the earnings yield (“EY”) of the S&P 500 for the past 135 years versus the US 10-year Treasury yield (precursors of S&P 500 before 1957 and precursors of 10-year Treasury in early years, based on data assemble by Dr. Robert Shiller of Yale).

As it turns out the earnings yield is just about right at the median level, meaning the index is properly priced for the current interest rate situation. But the current interest rate situation isn’t priced right and has to change eventually, possibly sooner than later. At that time, the S&PP 500 would be overpriced and prone to price reduction.



Figure 10 shows the US Treasury 10-year rate and precursors back to 1881 (135 years). The recent rate is 1.59% and the median is 3.76%. It has been all over the yield range for the past 60 years, showing its can go much higher under some circumstances. But it is currently at the lowest rate in 135 years, which suggests the only logical probability is up (even if down more for a while). When rates rise, all other investments will make adjustments for the relativities to this theoretically zero credit risk vehicle. As it approaches mean level (or shoots past the mean). Mean reversion will be the name of the game for other assets too.




Back to the present, the breadth damage done in the second half of 2015 and the first quarter of 2016 is healed, and breadth indicators support the current rally.

3-month (gray), 6-month (blue) and 1-year pressure within the S&P 1500 is net to the Buying side and rising after a long period of decline and into net Selling territory in 2014 and 2015.


The percentage of S& 1500 stocks in Correction, Bear or Severe Bear condition has returned to pre-Correction levels and is improving.


The percentage of S&P 1500 stocks within 2% of their 12-month high is in good shape.



Dividend Growth Stocks for a Low Price Return Stock Market

Friday, December 18th, 2015
  • ACE, ADP, Microsoft and Raytheon look to us to be attractive long-term dividend growth investments; and they have been so in the long-term and short-term past
  • High quality, low leverage stocks with long histories of persistent dividend payment and growth are important in the low forward price return US stock market expected for the next few years
  • Free cash flow is to be prized in stock selection when thinking about weathering storms
  • Stocks that have paid and increased dividends though multiple recessions could help investors sleep on those investments

Most analysts agree that total return for US stocks over the next few years will be modest.  When expected price returns are high, dividend yield takes a back seat for many investors (not necessarily conservative or retired investors), because of their low contribution to total return.  When expected price returns are modest or low (as they are now), dividends get up in the front seat, and maybe even the driver’s seat.

It seems to us that at least for a good part of a portfolio for retirees and near-term pre-retirees, dividends should be in the front seat.  That is not necessarily something for younger investors with at least, say, 10 years before retirement; and who are still in the earning and asset accumulation stage of their financial lives.

So this investment note is probably more suitable for the retiree or near-term retiree crowd (or any other investor who for whatever reason is attracted to dividend stocks).  And this note is not about reaching for yield.  It is about finding high quality, steady dividend growth companies, that have weathered the test of time; and up and down markets.

We always begin our search for opportunity with a quantitative filter.  We think you really have to do that, unless you rely in tips on TV, radio or investment media — something that will not expose you to the full range of possibly good ideas. And, more importantly, such tips will seldom give you much depth — but you can research them to see if they work for you if that is your cup of tea.

I suppose you could say this article also a tip, but we think its different.  It is different, in great part, because we take you through the steps of how we got to our conclusion, so you have the basis to make your own evaluation, and to determine what additional research you need to do for your self if any of the ideas here seem potentially attractive.

There are thousands of ways to set up a filter with different criteria categories and different parameters within the categories; and we use several different filters to generate ideas.  This is just one filter, not the only filter than makes sense to us.

There are over 8,000 listed securities on the NYSE, NASDAQ and AMEX.  Nobody can review them all, so a filter reduces the size of the universe to examine.  Our preliminary quantitative filter yesterday reduced 8,000+ securities to a list of 15.   Here is how we go those 15.


  • Dividend Growth Consistency: Paid and increased dividends for at least 8 years (through 2008-2009 market crash)
  • Dividend Growth Rate: minimum 3% annualized over 1, 3, and 5 years
  • Current Yield: >= 2%
  • Trailing Payout Ratio:  less than 100% (except for REITs or MLPs)
  • Debt-to-Equity: maximum 2
  • PEG Ratio: > 0 and < 3
  • 8-Year Price Change: better than zero (traverses last recession)
  • 1-Year Price Change:  better than negative 5%
  • Liquidity: 3-month average per minute trading volume is at least $10,000
  • Quality Rating: by at least one of Value Line, Standard & Poor’s, MSCI or Wright Investors’ Services
  • Consensus 12-mo Target Price/Market Price: >=1


This table lists the 15 filter survivors, along with their sector and industry.

(click image to enlarge)


We are concerned these days about free cash flow, that could be helpful if there is margin compression due to a sales slump, increased interest costs, or some other adverse development.  Because of that concern, we visually examined free cash flow charts for the 15 filter survivors and found 6 stocks with a nice enough year-by-year pattern and enough total free cash flow to give us some comfort.  Their charts are shown below, also presenting their price, their revenue and their dividend.


Of the 15 filter survivors, 6 look best after reviewing charts of free cash flow.

Declining revenue at LEG is unattractive.  Declining revenue at RTN is much less concerning, because it was based on defense sequester, which will end; and most importantly RTN’s critical role in weapons systems for the war with ISIS.

2015-12-17_ ACE 2015-12-17_ ADP 2015-12-17_ LEG 2015-12-17_ MSFT 2015-12-17_ RTN 2015-12-17_ SJM

Also because of concerns about a tepid global economy, we would currently favor quality stocks more than usual as an extra level of comfort in the event that things go poorly in the markets.  This table shows the quality ratings for the 6 stocks remaining in our filter.



A synopsis of how the firms describe their rating goes like this:

  • S&P Capital IQ Earnings & Dividend Rank: Growth and stability of earnings and dividends
  • Value Line Financial Strength Rating: balance sheet leverage, business risk, the level and direction of profits, cash flow, earned returns, cash, corporate size, stock price, cash on hand, and net of debt
  • MSCI Quality Index: Durable business models with sustainable competitive advantage; high ROE, stable earnings with low business cycle correlation, and  strong balance sheets with low leverage.
  • Wright Investors’ Service Quality Rating: (1) Liquidity, (2) Financial Strength, (3) Profitability & Stability, and (4) Growth. The ratings are based on 32 factors (8 for each of the four rating elements) using 5-6 years of corporate records and other investment data. The highest possible score is AAA20.  The lowest possible score excluding certain designations for insufficient information or time frame, is CCC0.  They consider the minimum rating for “quality” to be BBB4.

By these ratings, MSFT is clearly best and SJM is probably worst.

The Street (mostly Sell-Side firms) publish their 1-year forward price targets.  The graphics that follow present the composite Street view of each of the 6 stocks.


Looking at the analyst estimates, LEG looks least attractive.  ADP looks most attractive to the Street consensus

2015-12-17_Consensus_ACE 2015-12-17_Consensus_ADP 2015-12-17_Consensus_LEG 2015-12-17_Consensus_MSFT 2015-12-17_Consensus_RTN 2015-12-17_Consensus_SJM



Two leading independent analytics services are Standard and Poor’s Capital IQ and Value Line.  They approach the matter of rating differently.  S&P is more qualitative and Value Line is more quantitative.  They sometimes agree and often do not.  An example here is on ADP where they are as far apart as they can possibly be, with S&P saying stay away and Value Line saying jump on board.

Fidelity publishes the view of a variety of mostly independent analysts, and then Reuters uses a proprietary weighting system to come up with a single score from 0-10 called StarMine.  They weight the analyst opinions based on the historical accuracy of each analyst firm for the sector in which the stock they are rating belongs.

S&P Capital IQ uses a 1-5 rating system, where 5 is best and 1 is worst (Stars are for year ahead return, and Fair Value is market price versus the S&P view of fair value).  Value line uses a rating system from 1-5, where 1 is best and 5 is worst (their Earnings Predictability is a relative measure of the reliability of earnings forecasts).

Here is how each service rated each of our 6 selections.

By these three services, LEG looks better than in the Street consensus and ADP looks worst, based on S&P giving ADP an outright Sell  and a most overvalued price versus Fair Value.  ACE is clearly on top according to these sources.




Nothing beats reading the full SEC filings, and studying the full set of financial statements and footnotes.  That said a summary look at selected financial data can focus attention on a stock or divert attention elsewhere.

The first table presents absolute Dollar amounts (in $millions) for selected financial data.  The second table presents the same data on a common size basis (each data point expressed as a percentage of sales).



MSFT has the best EBITDA margin, but apparently pays more tax, because it has the same net income ratio as ACE and ADP which have lower EBITDA margins.  The all have good Current Ratios (MSFT the best).  SJM has a negative tangible equity, because its intangibles exceed its book equity.


LEG is the weakest in overall growth rates.

ACE seems to be the most consistent average to above average performer, and may benefit most by rising interest rates.

MSFT has been weak on EPS growth, but strong on sales and dividend growth.  They have the resources to keep the dividends coming, and their negative EPS has been significantly impacted by write-downs of discontinued businesses, which may not be as problematic going forward.

RTN has poor historical revenue growth, but restocking and development of the US high-tech weaponry arsenal is likely, and they would be a direct beneficiary.

SJM has had earnings growth problems (as has LEG), but has kept dividends growing nicely, and they have some product lines with strong brand equity that should carry them forward (e.g. Smuckers jellies and jams, Jiff peanut butter, Pillsbury, Folgers coffee, Kibbles n’Bits and 9Lives cat food)


A really important point for us at this juncture in this time of expected low price returns and high importance of dividend return (and for the needs or our mostly near retirement and retired clients), is the persistence and growth of dividends through difficult times.

Each stock in this list of 6 has paid and increased dividends for at least 11 years (RTN) and as long as 44 years (LEG).  To put those long periods into more functional perspective, we looked up all of the recessions in the last 44 years and counted how many recessions each stock lived through while paying and increasing their dividend.

The more recessions they weathered, the more likely they are, we think, to weather the next one.  If a retiree can count on the dividend, even if the stock price is gyrating (particularly if the retiree can live on the income from the portfolio alone), the more the retiree can sleep at night, and be less concerned about the price of the stock in short periods of a year or two.

LEG persisted with dividend growth through 7 recessions — pretty impressive.  ADP persisted through 6 recessions — also pretty impressive.

Just because a stock persisted through fewer recessions is not necessarily a ding on performance, because they may not have existed at all of those times.  MSFT is an example of that.

Lastly for growth, we engaged in an entirely hypothetical calculation just to possibly provide some scope of future dividend payback of the original purchase price.  These calculations should not be relied upon, just reflected upon.

We projected the 7 years historical dividend growth rate forward 7 years; then the 5-year history out 5 years; then the 3-year history out 3 years to see how much of the purchase price might be recovered before a possible sale of the stock at the end of those periods.

Then we projected out 5 years again using the average of the 7, 5 and 3 year dividend growth rates; and once more using only the minimum growth rate among the 7, 5 and 3 years rates.

By those calculations MSFT looks best and SJM works, and none are bad.


Most of you probably have a reasonable idea what most of the 6 stock do, but here are business descriptions to paint a possibly fuller picture of each company’s business.

ACE: ACE Limited is a holding company. The Company is a global insurance and reinsurance company. The Company offers commercial insurance products and service offerings, such as risk management programs, loss control and engineering and complex claims management. It provides specialized insurance products to niche areas, such as aviation and energy. It also offers personal lines insurance coverage, including homeowners, automobile, valuables, umbrella liability and recreational marine products. In addition, it supplies personal accident, supplemental health and life insurance to individuals in select countries. The Company’s segments include Insurance – North American P&C, Insurance – North American Agriculture, Insurance – Overseas General, Global Reinsurance and Life.

ADP: Automatic Data Processing, Inc. (ADP) is a provider of human capital management (HCM) solutions and business process outsourcing. The Company operates through two segments: Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, recruiting and talent management, human resources management, insurance services, retirement services and payment and compliance solutions. The Company’s PEO business, ADP TotalSource, offers small and mid-sized businesses human resources (HR) outsourcing solution through a co-employment model. ADP TotalSource includes HR management and employee benefits functions, including HR administration, employee benefits and employer liability management, into a single-source solution, including HR administration, employee benefits and employer liability management.

LEG: Leggett & Platt, Incorporated is a manufacturer that conceives, designs and produces a range of engineered components and products found in homes, offices, automobiles and commercial aircraft. The Company operates in four segments: Residential Furnishings segment, which manufactures steel coiled bedsprings; Commercial Fixturing & Components segment, which include work furniture group that designs, manufactures, and distributes a range of engineered components and products primarily for the office seating market; Industrial Materials segment consists of wire group, which operates a steel rod mill and tubing group, which supplies welded steel tubing and Specialized Products segment designs, manufactures and sells products, including automotive seating components, specialized machinery and equipment, and service van interiors. Its brands include Semi-Flex, ComfortCore, Mira-Coil, Lura-Flex, Superlastic, Super Sagless, Tack & Jump, Schukra, Gribetz, Masterack and Hanes, among others.

MSFT: Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers. The Company operates in five segments: Devices and Consumer (D&C) Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. The Company’s products include operating systems for computing devices, servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. It also offers cloud-based solutions that provide customers with software, services and content over the Internet by way of shared computing resources located in centralized data centers. It provides consulting and product and solution support services.

RTN: Raytheon Company, together with its subsidiaries, is a technology Company that specializes in defense and other Government markets. The Company develops products, services and solutions in markets: sensing; effects; command, control, communications and intelligence (C3I); and mission support, as well as cyber and information security. The Company operates in four segments: Integrated Defense Systems (IDS); Intelligence, Information and Services; Missile Systems, and Space and Airborne Systems. The Company serves both domestic and international customers, as both a prime contractor and subcontractor on a portfolio of defense and related programs primarily for Government customers. The Company’s products include Global Integrated Sensors, Integrated Air & Missile Defense, Cybersecurity and Special Missions, Global Training Solutions, Land Warfare Systems, Advanced Missile Systems, Tactical Airborne Systems, Advanced Missile Systems and Electronic Warfare Systems.

SJM: The J. M. Smucker Company is a manufacturer and marketer of consumer food and beverage products and pet food and pet snacks in North America. The Company has four segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International, Foodservice and Natural Foods. The Company’s U.S. retail market segments consist of the sale of branded food products to consumers through retail outlets in North America. The Company’s International, Foodservice and Natural Foods segment represents sales outside of the U.S. retail market segments. The Company’s principal consumer food and beverage products are coffee, peanut butter, fruit spreads, shortening and oils, baking mixes and ready-to-spread frostings, canned milk, flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, pickles, condiments, grain products and nut mix products. The Company’s pet products consist of dry and wet dog food, dry and wet cat food, dog snacks and cat snacks.


We own ACE, ADP and RTN; are thinking about MSFT, which we have owned in the past.

  • ACE as an insurance company will probably benefit by interest rates as they rise
  • ADP will benefit by an improving jobs picture, and ever more complex benefits and HR issues
  • RTN will benefit by the increasing reliance of high-tech warfare, and the current war with ISIS
  • MSFT is coming back with its Windows 10 system, its own computer brand, and cloud platform (and a new and better CEO)

This note was written on Wednesday December 16, 2015.  The following charts were generated at end-of-day Friday December 18, 2015.


These chars plot the dividend adjusted percentage performance of each of the 6 stocks versus an S&P 500 ETF (in black).

10 Years Monthly



3 Years Weekly




3 Months Daily



Bear Market Watch (2015-09-20)

Tuesday, September 22nd, 2015
  • S&P 500 is still in Correction, but multiple indicators are pointing to increasing possibility of a Bear
  • 4 component binary indicator effectively called last 2 major tops and bottoms — rings warning at this time
  • Significant cash positions are a prudent tactical allocation for retirees and others who cannot tolerate a potentially large drawdown
  • Accepting possible opportunity cost now may be better than risking large loss to pursue gain.

[this is our letter to clients 2015/09/21]

The S&P 500 continues to look very weak, even though it has recovered from its worst levels in the last several days.

We continue to hold large cash positions (and have done so for a few months now) either for retiree or near retiree accounts that cannot tolerate a potentially large draw down, or for accounts that prefer to make tactical allocation changes between cash and stocks in the face of infrequent but potentially large price declines in the S&P 500.

We sincerely hope we are in no more than a correction, but believe by virtue of rational indicators that more may be brewing.

We would rather be safe than sorry, and are prepared to incur certain opportunity cost in lieu of capital loss by holding significant cash positions – which we expect to reinvest when the same indicators suggest the dark skies have cleared.

In an end of August letter we discussed a variety of Bull/Bear indicators — which we subsequently published on our blog titled:
Correction Yes; Bear Probably Not Soon, But Possible — Key Indicators Discussed

The last two images in this letter update the summary tables for that discussion.

The following chart introduces you to a simple set of 4 binary indicators we have found collectively to be a pretty good indicator of major market trend changes, based on monthly data. Taken together those 4 binary indicators suggest we are 75% of the way to a clear market EXIT point. The Money Flow indicator (one of the 4 binary indicators) is the 25% that is still positive

We have annotated the chart with large semi-transparent red and green dots to show how the indicators identified key major trend changes over the last 20 years.

When the bold red line in Panel #5 is at the zero level, the major market trend is expected to be DOWN. When the bold red line in Panel #5 is at 100, the major market trend is expected to be UP.

(click images to enlarge)



Main Panel:

  • Prices (black vertical bars)
  • 10-month simple moving average – same as 200-day moving average (gold)
  • continuous 10% correction level from trailing 1-year high (dashed red)
  • continuous 20% bear level from trailing 1-year high (solid red)
  • parabolic stop & reverse indicator (dotted blue) [indicator description]
  • money flow index (black line – left scale) [indicator description]

Panel #1: binary indicator:
(Price position relative to moving average)

  • if price >10-month simple moving average, then 1, else 0 (where 1 = Long)

Panel #2: binary indicator:
(Direction of leading edge or moving average)

  • if leading edge of 10-month simple moving average UP, then 1, else 0 (where 1 = Long)

Panel #3: binary indicator:
(Time limits for a trending market to make significant up or down movement)

Panel #4: binary indicator:
(Trading volume weighted tendency for closing price to be in the upper or lower part of daily price range)

  • if money flow index >50, then 1, else 0 (where 1 = Long)

Panel #5: summation of values from Panels #1 – #4:

  • if sum = 4, then 100% Long (ENTER)
  • if sum = 3, then 75% Long (or observing development)
  • if sum = 2, then 50% Long (or observing development)
  • if sum = 1, then 25% Long (or observing development)
  • if sum = 0, then 0% Long (EXIT)

Here are the same binary indicators applied to monthly, weekly and daily data presented side-by-side. Do note that the frequency of whipsaws (false or highly transient indications) for weekly and daily periods are high. The method is best suited for monthly periods, but perhaps the weekly and daily data is useful to see how the current month is developing before it ends and can be added to the monthly chart.


The weekly data is solidly negative, but the daily data is trending to positive, consistent with the recent relief rally in the S&P 500.

This overall negative picture is consistent with the other market conditions dimensions we have discussed with you before (also published in our blog 08/30/2015), and which are summarized here in these two tables as of 09/18/2015:



We are in 50% or higher cash positions in accounts that do not have the capacity to withstand up to 3 years of negative stock returns. We are not predicting three years of negative returns, but for actively retired or near retirement clients, the deleterious impact of fixed amount withdrawals on a volatile portfolio in a negative return period can be severe – the “Risk of Ruin” (outliving your assets). Conservation takes precedence over growth in those situations.


Investment funds directly referenced or based on named indexes in this article:  SPY (S&P 500), IVV (S&P 500), VOO (S&P 500), VFINX (S&P 500), OEF (S&P 100), MDY (S&P 400), IVOO (S&P 400), IJR (S&P 600), VIOO (S&P 600).

More importantly, since the S&P 500 covers more than 80% of the US stocks market-cap, and with the S&P 400 and S&P 600 cover nearly all of the market-cap; this article is about the US stock market as a whole, and virtually all of the broad-based ETFs or mutual funds available.


Correction Yes; Bear Probably Not Soon, But Possible — Key Indicators Discussed

Sunday, August 30th, 2015

this is our 08/30/2015 letter to clients]

The S&P 500 is the most important US stock index — most followed, most used as a benchmark, most used to measure and compensate fund managers, among the longest histories, and covering most of the market-cap of the US.  That index is in a downtrend, and a more defensive positions is appropriate.

Moving averages are the simplest way to judge whether a trend is UP or DOWN.  A trend, whether UP or DOWN remains in force until proven otherwise.  No proof of a reversal back to UP is evident at this time.

(click images to enlarge)


However over long periods, downtrends such as this become less of a problem as the length of the period increases (thanks to Frank Case of AlacrityConsultingAssociates for pointing us to this chart from Charles Schwab, which clearly makes the point).


Just how much more defensive you should be varies:

  • based on your time horizon before needing to draw on the portfolio for living expenses
  • based on your surplus or deficiency of assets for those near or in retirement
  • based on your level of conservatism or aggressiveness in your long-term allocation
  • based on the spread of your assets across tax-deferred and regular taxable accounts
  • based on your emotional capacity to withstand short-term fluctuations in your portfolio value
  • based on how reasonable your believe our market conditions analysis to be
  • and other factors

There are many forms of being more defensive, only one of which is exiting the stock market – for example:

  • selling some stock and holding tactical cash
  • substituting more aggressive stocks with more conservative stocks
  • increasing bond allocation while decreasing stocks allocation
  • purchasing long/short or market neutral funds
  • purchasing inverse funds
  • shorting index funds against individual stock portfolios
  • purchasing PUT options
  • purchasing certain minimally correlated alternative assets

Let me be very clear, the aggregate historical evidence is that attempting to enter and exit the market (except for major Bears, like 2000 and 2008, results in underperformance. You get out after a decline as begun, and get back in after a recovery has taken place (or worse yet, you are whipsawed and get in an out a few time during a cycle) with each round trip being less profitable than having stayed invested.  Getting in and out is a two decision process, why and when to exit, and why and when to re-enter.  For most people that means underperformance.

However, for those for whom preservation and avoidance of major drawdowns during periods of withdrawal is paramount, underperformance is an acceptable “opportunity cost” in exchange for “risk of ruin” (outliving assets).  The risk of outliving assets is increased when a schedule of fixed or rising withdrawals is made from a highly volatile portfolio (thus the rationale for holding bonds as well as stock over the long haul); and is particularly dangerous if the early years of retirement are characterized by declining markets.

This chart for JP Morgan Asset Management shows the impact of being out of the market for certain numbers of top performing days  from 1980 through 2014 (note that some of the top performing days are during early days of recoveries).


We’ll talk more about that and sustainable retirement withdrawal rates in a future letter.

So what you should or should not do is quite particular to your circumstances.

All that said, what is the condition of the stock market today?  It is in a downtrend, but what are some of the details?

A summary of US stock market details is this: 

  • We are in a correction, or at least were last week – it is uncertain whether the rally of last few days is temporary or will be followed by a new test of the recent low – we assume a new test is likely
  • The yield curve (namely the “term spread” – short-term Treasury rates compared to long-term Treasury rates) IS NOT predicting a Bear
  • The Federal Reserve Financial Stress Indexes ARE NOT predicting a Bear
  • The Breadth indicators for the S&P 500 and other key indexes are virtually all in very negative territory, explaining the Correction and possibly predicting a Bear
  • The price to moving average data for the indexes are all negative, explaining the Correction and possible predicting a Bear
  • The reported earnings are down which may predict a Bear.
  • The forward earnings estimates are up, giving a more favorable view – but other unlike the other indicators are only opinions, not facts
  • Valuation expressed as “earnings yield” (inverse of P/E) is in the “normal” range

Here is a table that lists and quantifies the indicators.  Following the table are the charts from which we pulled the indicator values (along with a bullet point discussion of each chart).  You can decide for yourself if you agree with our UP and DOWN readings on the indicators that required a visual inspection.

Indicators450pix 2015-08-30




  • S&P 500 in Figure 1 top panel shows price below the 200-day average  –BEARISH
  • Top panel also shows the 200-day average up with a flat end – BULLISH/NEUTRAL
  • Next panel (red) shows cumulative net new highs down – BEARISH
  • Next panel (red and black) shows new highs less new lows divided by sum of highs and lows – strong pike down points toward bottom and reduction in spike suggest possible Correction bottoming
  • Next panel (blue) shows cumulative net advancing issues down – BEARISH
  • Next panel (green) show cumulative net advancing volume down – BEARISH





  • S&P 500 in Figure 2 top panel same as Figure 1
  • Next panel (green) shows % of index constituents above 200-day average down and at 38.8% — BEARISH
  • Next panel (blue) shows % of index constituents with Bullish Point & Figure charts down and at 31.4% – BEARISH
  • Next panel (orange) shows 1-month option implied S&P 500 volatility divided by 3-month implied volatility – elevated but moderating – suggesting possible Correction bottoming




  • S&P 500 in Figure 3 top panel same as Figure 1
  • Next panel (red) shows equal weighted S&P 500 divided by market-cap weighted S&P 500 – down slightly recently – BEARISH
  • Next panel (black) shows equal weighted Top 200 divided by market-cap weighted Top 200 – down – BEARISH
  • Next panel (blue) shows equal weighted Mid 800 divided by market-cap weighted Mid 800 – down – BEARISH
  • Next panel (green) shows equal weighted Small 2000 divided by market-cap weighted Small 2000 – down — BEARISH




  • S&P 500 in Figure 4 top panel same as Figure 1
  • Next panel (blue) shows Federal Funds Rate flat at 0.13% — BULLISH (declining after peaking would be BEARISH)
  • Next panel (green) 3-mo / 10-yr yield ratio at 0.03 – BULLISH (ratio of >=1 would be BEARISH)
  • Next panel (orange) 2-yr / 10-yr yield ratio at  0.33 – BULLISH (ratio of >=1 would be BEARISH)
  • Next panel (purple) 5-yr / 10-yr yield ratio at 0.60 – BULLISH (ratio of >=1 would be BEARISH)




  • S&P 500 in Figure 5 top panel same as Figure 1
  • Next panel (green) shows the quarterly reported GAAP earnings, down from peak – BEARISH
  • Next panel (blue) shows the earnings yield (inverse of GAAP P/E) at 4.99% — normal range – NEUTRAL
  • Next panel (red) shows earnings divided by 10-yr Treasury yield at 2.28x – FAVORABLE
  • Next panel (purple) shows dividend yield divided by 10-yr Treasury yield at 0.96x  (with better tax treatment) – FAVORABLE




  • New York Stock Exchange in Figure 6 top panel shows price below the 200-day average  –- BEARISH
  • Top panel also shows 200-day average slightly turned down at the tip — BEARISH
  • Next panel (red) shows cumulative net new highs down – BEARISH
  • Next panel (blue) shows cumulative net advancing issues down – BEARISH
  • Next panel (green) show cumulative net advancing volume down – BEARISH




  • New York Stock Exchange in Figure 7 top panel  same as Figure 6
  • Next panel (green) shows % of index constituents above 200-day average down and at 29.65% — BEARISH
  • Next panel (blue) shows % of index constituents with Bullish Point & Figure charts down and at 34.04% – BEARISH
  • Next panel (orange) shows the number of new lows and the 200-day average of that count – recently spiked and now declining  — suggesting possible Correction bottoming




  • St. Louis Fed Financial Stress Index at -0.997 (normal = 0, < 0 = below normal stress)  — NEUTRAL
  • Cleveland Fed Financial Stress Index at -0.27 (normal = 0, , < 0 = below normal stress) — NEUTRAL
  • Black line is Wilshire 500 stock index (virtually 100% of investable US stocks)




  • S&P 100 Mega-Cap: 67.00% in Correction or Worse; 38.00% in Correction and 29.00% in Bear
  • S&P 500 Large-Cap: 66.46% in Correction or Worse; 36.38% in Correction and 30.08% in Bear
  • S&P 400 Mid-Cap: 70.34% in Correction or Worse; 32.55% in Correction and 37.80% in Bear
  • S&P 600 Small-Cap: 75.30% in Correction or Worse; 29.64% in Correction and 45.66% in Bear




  • S&P 500 has retraced 46% of its drop from a high of 2132,82 to a low of 1867.98, standing now at 1988.87 – still BEARISH
  • An important resistance level around 60% retracement has yet to be tested before this rally can begin to be seen as possibly sustainable – would become NEUTRAL to slightly BULLISH at 60%


SPY retracement 2015-08-30 


  • (shown in Figure 4) first half 2105 reported are down (mostly due to energy) — BEARISH
  • Bottom-Up operating earnings estimate for 2105 full year is modestly higher than 2014 – NEUTRAL
  • Bottom-UP operating earnings estimate for 2016 full year is higher than for 2015 (but forecasting accuracy out that far is suspect) — BULLISH





Patience tends to be rewarded in markets.  We may reach Bear status, but so far the technical data is mixed and not conclusive that a Bear comes next or soon (although one may be statistically due because of the age of the Bull market).

Reflecting the mixed data, for those client in or near retirement, and who do not have excess assets, we are essentially half invested and half cash within our equity policy allocation, and have been for about a month or more.

Happy to discuss this data with you.




Yield Curve (steep, flat or inverted from short-term to intermediate to long-term):  We use the ratio of the yields instead of the spread to “normalize” the relationship over long periods where rates are sometimes very high with large absolute differences, and other times when rates are low and the absolute differences are much smaller.  The ratio approach eliminates that comparison problem.  While the yield curve has predicted 11 of the past 9 recessions, a recession has NOT begun without a preceding or coincident flat or inverted yield curve.  Stocks begin Bear markets before recessions, and the yield curve almost always goes flat before stocks move to a Bear.  Here is what the New York Fed said:

“The difference between long-term and short-term interest rates (“the slope of the yield curve” or “the term spread”) has borne a consistent negative relationship with subsequent real economic activity in the United States, with a lead time of about four to six quarters. The measures of the yield curve most frequently employed are based on differences between interest rates on Treasury securities of contrasting maturities, for instance, ten years minus three months.

The measures of real activity for which predictive power has been found include GNP and GDP growth, growth in consumption, investment and industrial production, and economic recessions as dated by the National Bureau of Economic Research (NBER).

… The yield curve has predicted essentially every U.S. recession since 1950 with only one “false” signal, which preceded the credit crunch and slowdown in production in 1967″.

This chart illustrates the yield curve predicting recessions:


This chart shows how the yield curve tends of go flat before the stock market goes into a Bear:



St. Louis Fed Financial Stress Index

The STLFSI measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together. The latest STLFSI press release, with commentary, can be found at

Cleveland Financial Stress Index

The CFSI tracks stress in six types of markets: credit markets, equity markets, foreign exchange markets, funding markets (interbank markets), real estate markets, and securitization markets. The CFSI is a coincident indicator of systemic stress, where a high value of CFSI indicates high systemic financial stress. Units of CFSI are expressed as standardized differences from the mean (z-scores).


S&P 500 (SPY), S&P 400 (MDY), S&P 600 (IJR), Russell Top 200 (IWL), Russell 800 (IWR), Russell 2000 (IWM), Equal Weight S&P 500 (RSP), Equal Weight Russell Top 200 (EQWL), Equal Weight Russell 800 (EWRM), Equal Weight Russell 2000 (EWRS)