An Indicator May Mark A Market Slowdown

Includes: SPY, VOO
by: Prescient Investment Analysis


Strong gains have been realized in the past few months.

The market is expensive under one non-obscure measure.

Underpinnings continue to support equities however.

Since November of 2016 stocks have had an upward trajectory. True to past precedent, it has occurred despite the negativity of many important voices. Further, as energy and food are relatively inexpensive, while the economy continues to add jobs, everything may well continue to hold up.

The S&P index (NYSEARCA:SPY), or low cost Vanguard fund (NYSEARCA:VOO), has reset it's all time high. Using the actual index, 2,400 has been the recent point of resistance. The situation is of course different from getting in after a crash in which pricing has been overshot to the downside so that patience should ultimately reward the value investor. Further, per one key measure that can be reasonably expected to have bearing, upside should be tapered.

SPY Chart

SPY data by YCharts

The Shiller cyclically adjusted price to earnings (CAPE) ratio is named after a Nobel laureate. Criticism has been made on the grounds that it still understates future equity returns. However, it must be flashing on the screens of all academics that the media turns to for commentary (the same who have been negative on stocks since November and who may resent that campus buildings can be named after rich benefactors), as well as sophisticated quantitative traders who are involved in daily market movements. As shown below, it is approaching 30, and the graph gives reason to suspect that gains might be harder to come by in the near term.

As has been put in writing previously, a combination of surging energy prices, borrowing costs, or currency valuations could defeat the stock market. However, at this time, none are the case. Though stocks are expensive, earnings are still increasing. Consequently, there is no obvious reason for a crash.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

To summarize, the S&P 500 has gained in a short amount of time to find resistance at 2,400. Stocks have gotten expensive under one measure that can reasonably be expected to be influential. Consequently, as the market is underpinned with stability, the next month or two could be marked by a tendency to move sideways.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VOO over the next 72 hours.

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: I may initiate a short position in SPY over the next 72 hours.