New Stock Market Highs Fighting Many More Outside Pressures Than Usual: Time to Panic?

The latest reading from Investors Intelligence showed a handy gain in bullish investors and a decrease in those expecting a correction. These may not be at extremes yet, but they are very frequently used as contrarian indicators.

Bonds yields tanked after the Brexit news broke, with the 10-year Treasury yield falling to under 1.35% from 1.58% before the Brexit news. Those yields had risen back up to over 1.50% after a poor 10-year Treasury auction on Tuesday, July 12. Still, a 30-year Treasury long-bond auction managed to help erase some of the prior day’s losses.

Standard & Poor’s sent us the following data for the current market valuation and expected earnings trends for the S&P 500 Index:

Aggregate second quarter 2016 S&P 500 earnings are estimated at $28.14 (EPS), an expected decline of 5.5% year-over-year and the fourth quarterly decline in a row. Only four of 10 S&P sectors are projected to have positive earnings growth: consumer discretionary (9.4%), industrials (6.6%), utilities (3.1%), and healthcare (3.1%) leading. The energy sector earnings once again is expected to post the largest decline in growth (at -81.8%), though the decline is an improvement from first quarter results. From a valuation perspective, the S&P 500 is trading at a big premium of 17.8 times forward 12 month earnings.

Merrill Lynch’s technical analysis team addressed the strength and key levels for this bull market, as follows:

The S&P 500 close above 2130.82 confirms the bull market from March 2009 as the second longest cyclical bull market. SPX follows improving breadth indicators & is breaking out. Upside counts: 2225, 2300 & 2420. Supports: 2074, 2000-1950. Many pre-Brexit patterns still exists today on EM, SXXP & UKX. See report for Net Tabs, OBOS & weekly relative ranks.

Investors capital flows are signaling that the wealthy investors and many institutional ones are holding vast amounts of cash rather than committing fully to stocks or bonds. Back in June the global investor cash holdings were 5.7%, according to Merrill Lynch data, but that is a high not seen since 2001.

At the end of June, there was a whopping $11.7 trillion in sovereign debt that came with negative interest rates. In July we have seen some unofficial data suggesting that it is now $13 billion with negative interest rates. That is being led by Japan, the core-EU nations and Switzerland.

The CBOE’s Volatility Index, the VISX (or the Fear Index), is back down at crazy levels — under 13.50, after having hit 25 during the Brexit. As this number climbs it means investors are worried, a contrarian indicator many investors use as a Buy signal. When it gets too low, it means that investors aren’t worried at all and are often too complacent. The iPath S&P 500 VIX ST Futures ETN (NYSEMKT: VXX) tracks this, but keep in mind that the ETF has done a poor job of avoiding tracking error and erosion over the course of a year when you compare performance. It also implies with a low VIX that is now dirt cheap to buy put options as a hedge against unknown downside.

A BDO fresh report from July is talking down the IPO market and talking down the future value of the so-called venture capital unicorn companies with valuations of $1 billion or more. BDO showed that the number of U.S. initial public offerings nosedived during the first six months of 2016, down by approximately 60% and with money raised down 66% versus a year ago. BDO warned about unicorn valuations:

A majority (52%) of capital markets executives at leading investment banks are predicting a serious correction in the valuations of these so-called “unicorns”.  Last year, in order to gain additional funding, some of these businesses went public at valuations considerably below their most recent round of private financing.  An overwhelming majority (85%) of bankers believe there will more of these type of offerings moving forward.

Anyhow, the point here is that the bond market is trying to find some sort of equilibrium at a time when currency moves and the flight to and from negative interest rates is taking place. How long equities will remain a haven into slowing growth remains up for debate. Maybe things will revolve back to watching gold and oil again.

So much for “Sell in May and Go Away!” in 2016. This market has been surprising on more fronts than it has not been. We keep hearing about the “new normal” being a weaker normal. So far we just aren’t seeing it, and investors still buy any and every pullback. Stay tuned.