3 Very Bearish Charts

I know it’s not fashionable to be bearish about anything these days, but I guess I just can’t kill the old risk manager in me. Given this predisposition, I wanted to highlight some potentially bearish indicators that have been popping up lately.  I’ll highlight three such indicators:

1)  The first indicator is from Thomson Reuters.  It shows the S&P 500’s negative-to-positive guidance trend.  According to TR the current reading for Q4 of 11.4 is at its worst level since they began recording the data.  Of course, this sets the bar low for Q4 earnings, but we have to wonder how much this will filter into 2014 earnings where analysts are currently expecting double digit growth.

 

bear1

(Thomson Reuters S&P 500 Negative-to-positive Guidance Trend)

2)  The second chart is the Investor’s Intelligence bull/bear difference.  This is a sentiment reading that tends to reach extremes when sentiment is heavily skewed in one direction or the other.  The current reading just shy of 40 has not been seen since summer of 2011 before the last significant sell-off.

bear3

 

(Investor’s Intelligence Bull/Bear Spread)

 

3)  The last indicator is a potential indication of how stretched the two above indicators have become.  It shows the S&P 500’s year-to-date return broken down by actual EPS growth and multiple expansion.  Of course, EPS growth is what the actual earnings growth has generated while multiple expansion represents what buyers are willing to pay for this stream of earnings.  As sentiment has soared investors have become increasingly willing to pay for a reduced share of EPS growth.

bear2

 

(S&P 500 Year-to-date return by EPS and multiple expansion)

 Food for thought….

 

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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Comments

  1. I have the data for the market since 1925 but I dont have the economic growth data. So does anyone out there know if there has been a year where the economy has experienced positive economic growth but the markets has gone backwards in the same year?

    regards
    Steve

  2. Hi Cullen,

    I see where Investor’s Intelligence is so often quoted when examining sentiment. I used to belong to that group. I highly doubt that group’s opinion comes anywhere near the threshold of scientific validity. Maybe it doesn’t need to, however it shouldn’t be treated as a bell-weather barometer because it ain’t. No one has ever examined the issue to my knowledge. Of course, I could be wrong. Sure enjoy your writing and the discourse with your readers.

    -ralph braseth

  3. #1 doesn’t matter. What matters is whether companies surprise to the upside. If they say Q4 will be bad – but then beat the estimates, it won’t matter what they say. It’s all about surprises – not guidance. Surprise to the upside = good for stocks. Surprise to the downside = not good for stocks.

  4. I think the recession at the turn of the century didn’t technically start until 2001, so my guess would be the year 2000?

  5. Ralph,

    This PDF produced by Ed Yardeni is a pretty invaluable data source for these technical indicators. He spends a significant amount of time on the II bull/bear ratio.

    http://www.yardeni.com/pub/peacockbullbear.pdf

    The general takeaway going back to 1987 on the S&P is that a bull/bear ratio greater than 3 tends to coincide with some type of sell-off of significance. The theory is that sellers overwhelm buyers since there are no significant buyers left based upon the lack of bearishness and therefore selling accelerates and becomes self-reinforcing.

    The Oct 07 peak in the S&P coincided with one of these episodes which tend to be fairly rare given the time period involved.

    Good luck.

  6. It turns out that economic growth, as defined by e.g. the growth rate of GDP, is not all that informative about the growth rates in the markets. Markets are far more volatile than economic growth. Furthermore, cycles of PE expansions/contractions can last for very long periods. They seem to be more crucial for future market long-term returns than economic growth.

    Another intriguing variable, as discussed in a recent paper by Rob Arnott, is demographics.

  7. Cullen,
    It would be very interesting to see a histoical chart for #3 to see what would be considered “typical” .

  8. That was the way it used to work, however over the past couple of years I have noticed a trend where companies that pre-anounced are just not getting punished for it. The better than expected game is now asymetrical, where pre announcements are rarely punished by the market and even if they are, Losses are recouped within a few trading sessions. Basically this is how we have gotten almost 80% of the market gains from mulitple expansion. This in my opinion is an anomaly and mostly due to the buy the dip mentality the fed has created. They want higher asset prices and they are getting it. Whether it is sustainable or not, who knows.

    So basically the people that got the run the past couple of years can not really tell us that it was due to better understanding of the system since most of it is coming from multiple expansion.
    And we didn’t even get into the quality of the “E” in PE and the recuction of float due to buyback.

    Please someone tell me what I am missing here and the how the global growth story refutes my analysis. Regards

  9. I have used the II data for 40 years. It has significant predictive content
    if (a) it is smoothed over several weeks (I use a 10 week exponential)
    (b) and if it “adjusted” for “monetary conditions”
    In English, this means it takes a higher level of bullishness to be
    negative when the Fed is not tightening than when it is.
    On this “adjusted” basis, it is clearly negative today but not
    as negative as the “raw” numbers would suggest. Over the
    years, the “raw” numbers have had only modest predictive
    ability as a contrary indicator – about .1 correlation with future
    6 month returns.

  10. Investors have been waiting for the other shoe to drop since 2008. Even at all time highs. Suppressed volatility makes everyone twitchy.

  11. Actually it’s all about whether buyers exist at certain price levels or not. Once there are no more buyers, game over.

  12. Having dealt with the retail investor for 27 years, I’ve seen their collective needs drive what seems to me to be a macro sense of investing. Simply put, when the retail investor sees that he/she will not see positive income (after tax and inflation above zero) from a CD, that investor will reluctantly but assuredly continue to venture out the risk curve…but only as far as they can stand. Said another way, if Kimberly Clark (and the rest of its growth cousins), continues to raise its dividend as it has since before I was born, then the educated investor will venture to its shares in lieu of the deficit-producing CD. The key for these investors is to keep a larger pile of zero percent cash on hand for expenses and calamities so that they can push their capital further out at risk. That said, if/when Ms Yellen and crew begin to raise short term rates, the risk-taking will change en masse. My guess is that predictions of rate increases in early 2016 will turn out to be ephemera. Low rates will turn out to be the new normal (as even the hint of higher rates will be devilish) which will cause even further multiple expansion. Forward PEs and even trailing PEs are still lower than historical norms. If earnings growth gets any legs and rates stay low, the rising dividend stocks will become even more expensive.