ONE OVERVALUED MARKET?

A recent research note from Gluskin Sheff’s David Rosenberg highlights the high valuation, high sentiment, and technicals  of the equity markets to highlight the bearish case:

• Fully 85% of S&P 500 stocks are now above their 50-day moving averages,  and;

• The median P/E multiple is now a whopping 22.2x.

• The degree of bullish sentiment in the latest Investor Intelligence Poll is a huge 72%;

Of course, much of this has been the case throughout the rally. While the technicals appear somewhat extended this is not unusual during a major market rally.   As we can see in the chart below, stocks have been well above their 50 day moving average for much of the rally and this has not served as an impediment:

As for earnings, we all know my thoughts here.  Earnings hit such a deep trough and estimates spiked so low that this has actually been fuel for the fire.  It might sound counter-intuitive, but the trough in estimates actually led to very poor earnings expectations which has fueled the rally higher.  As we’ve explained before, using the PE ratio to time investment decisions is a recipe for disaster.  The PE ratio is nothing more than a moving price target (which rarely reflects the true market value) divided by the guesstimates of the analyst community.  If we’ve learned one thing over the last 6 months it is that analysts can’t guess their way out of a wet paper bag.  The result is, in my opinion, one of the most misleading and overused investment indicators of all time.

In terms of sentiment we continue to see conflicting messages.  While the Investors Intelligence poll remains overly bullish we continue to see bearish data from the CFTC’s commitment of traders report, neutral data from the AAII and neutral data from State Street’s Institutional Money poll.  Cherry picking one report doesn’t mean sentiment is overly bullish.

There are real fundamental reasons to worry about the long-term viability of this rally, but these three should be taken with a grain of salt for now.