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Category: Chart of the Week

It’s No Surprise Stock Market Analysts Have Been Upgrading Price Forecasts At just the Wrong Time

It’s No Surprise Stock Market Analysts Have Been Upgrading Price Forecasts At just the Wrong Time.  In our view,  many Wall street analysts are about as reliable at forecasting stock prices and market direction as fortune tellers who use smoke, mirrors, and crystal balls to summon your long-dead great aunt. In fact, they are wrong so often that  they are  a fairly  reliable contrarian indicator on market direction (see chart and tables below). That’s why it is no surprise to us that Wall Street experienced another giant hiccup this week in the midst of analysts upgrading price forecasts. Why no surprise? The analysts were

upgrading despite warning signs based on historically-proven statistics we use that the market was climbing toward dangerously high price levels. To put this into perspective, we’ve been saying for weeks that the market was becoming very overbought based on very reliable indicators. That includes Warren Buffet’s favorite: Comparing total market  capitalization to the GDP, which was at one of its most dangerous levels ever.  We also talked about the S&P 500 relative stock industry being the most overbought In history.

It was this kind reliable, unemotional statistical  analysis we were using to tell you the market had become oversold in March when stocks collapsed spurred by the corona virus panic . And what were the wizards of Wall Street doing amid clear signs of a bottom? They were panicking because they’d been caught off guard at the peak. Rather than being  caught off guard again, they were following emotion.  So, they were downgrading price forecasts at an historic rate when the statistics were saying otherwise.  This all begs the question about whey are the analysts so wrong, so often. The obvious answer, of course, is they don’t follow the historically-proven statistics. Truth is these high-paid, so-called experts who should know better fall into the same emotional frenzies that make investor sentiment a highly reliable contrarian indicator. So, they also are subject to something we call  FEMO,  “the fear of missing out.”  Another to the mistaken belief that to disregard history because “this time things are different”

Now, the wall Street gurus will defend themselves by saying they couldn’t have predicted the coronavirus, just as they were caught off guard in the past by other events. That’s subject to another debate. Reality is that the statistics we use, and they too often ignore, are important indications on the health of the market.  In this way, you don’t have to know exactly what will cause the next downturn, or upsurge. However, what the statistics are telling you is that when stock prices are historically too high, for instance, you should be prepared for unforeseen events that could pull  the rug out from under it. And this time is never different.

It’s No Surprise Stock Market Analysts Have Been Upgrading Price Forecasts At just the Wrong Time
It’s No Surprise Stock Market Analysts Have Been Upgrading Price Forecasts At just the Wrong Time

Analysts are chasing the trend… again

Published on June 23, 2020 by Troy Bombardia

Analysts were aggressively upgrading their price targets for S&P 500 stocks almost 2 weeks ago as the U.S. stock market (and tech stocks in particular) surged. Keep in mind that back in March, analysts were downgrading their price targets at the fastest clip ever as they bet on the end of the world.

The following contrarian signal looks at the net number of S&P 500 stocks for which Wall Street analysts have upgraded their price target (# of upgrades – # of downgrades).

Analysts are chasing the trend... again
Analysts are chasing the trend… again

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Do Trump’s Chances Hinge on a Strong Market or Vice Versa?

“With a rise in social unrest, confusion over the pandemic response, and a highly volatile market, the probability of President Trump holding onto his office has dwindled,” says Jason Goepfert  of SentimenTrader.  Why? “Whatever one’s political association, there seems to be a clear correlation between re-election odds and the price path of the Dow Industrials,” says Goepfert. He notes, however, that with any correlation “it is hard to know whether it’s just happenstance, or even which one might be causing the other.”

Goeppert looked at the performance of the DJIA for the 100 days before a presidential election. That’s about the time until this year’s election. As the charts and tables below show, prior to a Republican winning, the Dow didn’t suffer a single loss. However, the DJIA showed losses for the six months when a sitting Republican lost to a Democrat.  Except for 1932. So, if history repeats itself in 2020, the President and the Wall Street bulls should be praying for a steady increase in the DJIA until election day.

 

Do Trump’s Chances Hinge on a Strong Market or Vice Versa?
Do Trump’s Chances Hinge on a Strong Market or Vice Versa?

 

Do Trump’s Chances Hinge on a Strong Market or Vice Versa?
Do Trump’s Chances Hinge on a Strong Market or Vice Versa?

 

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S&P 500 Relative Strength Stock Market Index is Most Overbought Ever: Be careful!

We use numerous indicators to guide us on the strength and weakness of the stock market in terms of when to buy, sold and hold.  One of the important short-term indicators we follow is the 14-day S&P 500 Relative Strength index (RSI) which shows us the percentage of stocks that are overbought or oversold in the S&P 500.  When the S&P 500 RSI is above 70% that tells us the stock market is overbought. Meanwhile, 30% and below tells us that the market is oversold. That generally indicates buying opportunities.  The chart below shows us that the S&P 500 RSI is not only over 70 but is at its most overbought level ever. That is an indication to be very careful.  Certainly for the short-term.

S&P 500 Relative Strength Stock Market Index is Most Overbought Ever: Be careful!
S&P 500 Relative Strength Stock Market Index is Most Overbought Ever: Be careful!

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Is It Finally Time for Value Stocks?

Is It Finally Time for Value Stocks?  In the summer of 1979, a BusinessWeek cover story pronounced “The Death of Equities.” Three years later in 1982 the stock market hit bottom and then rocketed higher. Since then the total return on the S&P 500 index with dividends reinvested has been more than 7,000%. This legendary wrongheaded  call on stocks comes to mind because  some so-called market commentators have been saying value stock investing is dead. It is true that growth stocks have outpaced value stocks for years, as shown by the value/growth ratio in the chart below. But it also is true that  the shift in market leadership between growth and value stocks runs in cycles, and when the shift happens it happens very fast.

Dimensional Fund Advisors in a recent study says that it is not the performance of value stocks (about 12.9% annualized)  that has been historically  out of whack, but that return on growth stocks has been abnormally high –at about 16.3 percent over the past 10 years. That compares with a 9.7 percent return since July 1926. So, what could turn the cycle around? For one thing, market values tend to eventually return to norms. So, there’s the possibility that a  market downturn might negatively affect growth stocks more than solid value stocks  because of the growth stocks’ elevated p/es. There’s also the possibility of  Increased interest rates spurred by inflation. That  could make many investors less willing to pay the high price-to-earnings multiples that growth stocks command in today’s low interest rate environment. There’s also the fact that value stocks tend to do  better in an economy recovering from a recession. To be clear, we’re not saying the cycle is about to reverse, but given the long term  ratio of growth over value, this is an area worth watching. Particularly when the market gurus begin to tell you to forget historical cycles,  this time it will be different.

Is It Finally Time for Value Stocks?
Is It Finally Time for Value Stocks?

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Historical Trends Suggest Major Stock Market Volatility and Weakness In The Months Ahead

Historical Trends Suggest Major Stock Market Volatility and Weakness In The Months Ahead.  Troy Bombardia is well known for his astute analysis on the stock market and trading based on historical trends.  He notes that huge swings in volatility in 2003 resulted in mostly bearish returns for the S&P 500 in the months ahead (See chart and table below). Today we appear to have a similar situation.  The market has recently swung from bear market territory of minus 20% below one-year highs to more than 33% of S&P stocks at eight week highs. That to us suggests stock market weakness for the next two to six months amid more high volatility.

Historical Trends Suggest Major Stock Market Volatility and Weakness In The Months Ahead
Historical Trends Suggest Major Stock Market Volatility and Weakness In The Months Ahead

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