Category: Uncategorized

Stock Market Sentiment Indicators Continue to Advise Caution

We use Investor sentiment as contrarian indicators of market direction. While short-term indicators are no longer oversold, suggesting the possibility of short-term bounces, the real story remains with the intermediate-term indicators. They suggest stock market investors should remain cautious, with no stock market bottom in sight, particularly in this period of high volatility and global economic and political uncertainty. We should also note that another bad sign for the stock market is that the weekly trading breadth remains very negative and new stock lows outnumbered new highs for the second week.

As for intermediate investor sentiment, The Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment barely changed to +31.2 from +31.4% last time (see chart). A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another contrarian warning sign for investors from this poll is that the group of advisors projecting a correction remained heavily in the minority,  barely moving to 33.0% from 32.4%.

Stock Market Sentiment Indicators Continue to Advise Caution
Stock Market Sentiment Indicators Continue to Advise Caution

Crestmont P/E is Warning Stock Market May Be Dangerously High

Crestmont Research’s Crestmont P/E gives us a better picture of price earnings to evaluate the stock market. As you can see in the chart in blue below, its present valuation at 32.1 is just slightly below the P/E at about the time the stock market bubble burst in 2000. Why is the Crestmont P/E created by Ed Easterling a better way to look at price earnings on a historical basis? As Easterling explains it, “the business cycle constantly distorts earnings from its core baseline trend.” The Crestmont P/E compensates for that distortion by normalizing earnings based upon the relationship between historical nominal GDP and reported EPS.

Crestmont P/E is Warning Stock Market May Be Dangerously High
Crestmont P/E is Warning Stock Market May Be Dangerously High

Ed Easterling is the author of Probable Outcomes: Secular Stock Market Insights and award-winning, Unexpected Returns: Understanding Secular Stock Market Cycles. He is currently President of an investment management and research firm.

 

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