The Big Shift

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Includes: BIBL, CHGX, CRF, DDM, DIA, DMRL, DOG, DUSA, DXD, EDOW, EEH, EPS, EQL, EQWS, ESGL, FEX, FWDD, GSEW, HUSV, IVV, IWL, IWM, JHML, JKD, OMFS, OTPIX, PMOM, PPLC, PSQ, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RVRS, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USA, USMC, UWM, VFINX, VOO, VTWO, VV, ZF
by: Singular Research
Summary

Is the market transitioning from bull to bear or rotating from high-multiple growth stocks to late-cycle, lower-P/E stocks ?

Our indicators point towards buy the dip.

Monetary and EPS momentum indicators are turning negative.

The Big Shift

Is the market transitioning from bull to bear or rotating from high-multiple growth stocks such as FAANG to a broader base of undervalued, lower-P/E, late-cycle value stocks. We believe it is the latter.

Indicators Point Towards Buy The Dip

Our technical indicators support the "buy the dip" approach. The latest readings on the VIX as a measure of extreme fear supports our "buy the dip" thesis. We study this below using a weekly spike close above 20 as an initial level to indicate an extreme sell-off phase in the market.
There have been five such instances since 2012 where the VIX has had a weekly close at +20, and each time, the S&P 500 has traded higher within the next 6 months, ranging from +3% to +12%, following this event

Buy the dip

6th time VIX weekly close >20

S&P 500 higher 6 months after the last 5 times

Date

VIX

SPY

SPY +6 months

% Ch

5/31/12

24

131

142

8.30%

1/30/15

21

199

210

5.50%

8/15/15

53

197

206

9.60%

2/29/16

20

193

217

12.40%

2/28/18

50

271

290

3.30%

10/12/18

20

275

.

?

VIX chart 2013-2018

VIX Chart 2013-2018


Using the key indicator level of the S&P 500 closing below its 200-day moving average on the monthly closing basis has been instructive to avoid a bear decline. This phenomenon has occurred only once in the past 5 years. It occurred in September of 2015 and the S&P 500 did not recover and break above its 200-day moving average until April of 2016, suffering a decline from top to bottom of 15%, defined as a severe correction.

S&P 500 chart with 200-day MA

SPY

Other Key Indicators, Such As Sentiment, Valuation and Liquidity Measures Remain Bullish

Our liquidity indicators are positive, as mega-cap buyback announcements totaled over $40 billion in net inflows, led by Texas Instruments (NYSE:TXN) and Qualcomm (NASDAQ:QCOM). However, there is a blackout period in the month of October, thus depriving the market of buying support from one of the largest sources of buying power. This tends to augment sell-offs.

Our Monetary Indicator Is Neutral

Although forward interest rates point to more rate hikes of approximately 50 basis points, our adjusted monetary growth is -.80, showing a Fed that is slightly restrictive, yet the slope of the yield curve is still positive.

Historical Treasury Yield Chart

Also, our earnings momentum indicator has gone negative, based on declining earnings growth going into 2019, decelerating from an off-the-charts 20% growth in 2018, bolstered by Trump's tax cuts. EPS growth estimates are moderating to a still healthy 10% growth estimated for 2019.

Even after adjusting for higher expected interest rates, our valuation indicator remains positive. It is important to know that the S&P 500 trades at 16.8 times forward 12 months' earnings projections, which is a slight premium to its historical average of 16 times.

Near term, with the economic momentum of GDP growing 3-4%, we feel very comfortable with the current consensus earnings estimates for the next 12 months.

We estimate S&P 500 fair value to be at 3270 based on 18 x S&P 500 EPS estimates of $178 for 2019. This is a 9% risk-adjusted return to fair value, or 18% total return potential in the next 12 months. Thus, we are confident to suggest buying the dip during the October 2018 sell-off.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.