What Data Tell About The Bear Thesis

| About: SPDR S&P (SPY)
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A quick look at short interest, market breadth, valuation, EPS, unemployment, housing starts and retail sales.

The market is overpriced, but the systemic risk is low.

In any market conditions, caution is recommended.

In the last 10 days, you have probably seen refurbished bearish articles with arguments full of common sense. They will eventually be right one day. Rather than wasting time on opinions (including mine), I prefer looking at objective data, and they tell us that the bear thesis is a bit thin.

Short Interest

Short interest, when aggregated across firms and appropriately de-trended, is a statistically and economically significant predictor of future market excess returns over our 1973:01 to 2013:12 sample period. In fact, our short interest index is arguably the strongest known predictor of the equity risk premium.

(Short Interest and Aggregate Stock Returns - Rapach, Ringgenberg, Zhou - Feb. 2015 - Washington University in St. Louis)

The authors of this research have designed a short-interest index beating 14 of the most famous timing indicators. I use this concept as a part of my systemic risk indicator MTS4 (free access here), and its sophisticated version MTS10 (in my weekly services). I simplified it by limiting the universe to S&P 500 companies and replacing a complicated de-trending calculation by moving averages. An article of May 2015 gives more details.

Here is the average short-interest in S&P 500 stocks (NYSEARCA:SPY) in percentage between 2006 and 9/19/2016:

Charts: portfolio123

Academic research shows that the average short-interest in stocks may be the best predictor of market return. The higher the value, the worst the expectations. It has been higher than usual since the second half of 2015, but is trending down for about 6 months.

Market Breadth

Many indicators have been created on the concept of market breadth. The idea is to check the percentage of bullish stocks according to a technical indicator. As an example, the next chart plots the percentage of S&P 500 stocks above their 200-day single moving averages.

It is supposed to send a bearish signal when crossing below 20%. It was close to it in January, but is now above 70%.


The next chart shows the median P/E in the S&P 500 universe (excluding extraordinary items, trailing 12 months).

It is high, but not extreme. The median P/E was a bit higher in January 2004 than today, with still 4 years of bull market to run. It doesn't mean that we are safe for the next 4 years, but that the current value is not a good predictor for future returns. According to my metrics, the market is overpriced by about 22%.

Aggregate EPS

The next chart plots the aggregate EPS trend for S&P 500 companies, trailing 12 months.

The downtrend started in January 2015 is concerning. However, it looks stabilizing for a few months, unlike in 2001 and 2008.

Aggregate expected EPS

Now, let's have a look at a time-weighted blend of current year and next year aggregate estimate EPS.

It has been in a horizontal range since 2014, and is now in the middle of the range.


The unemployment rate has been in a steady downtrend since 2010:

Housing starts are in an uptrend and far from extremes:

Retail and Food sales are also bullish:

Objective data show no reason to rush out of stocks. Of course, black swans are unpredictable and rate-related concerns are justified. Hedging tactics may help protect your portfolio, especially in September, the most treacherous month for investors.

Data and charts: portfolio123

Disclosure: I am/we are long SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long SPY in a risk-based ETF model, net short S&P 500 due to stock portfolio hedging.