The stock market (^GSPC) continues to rally to new all-time highs, despite stretched valuations and the uncertain outlook for earnings.
In a recent research note, Gluskin Sheff’s David Rosenberg identified 10 reasons to be cautious on the markets. Here they are verbatim:
Consensus Inc. Bullish Sentiment: 75%
NYSE Put/Call Ratio: 0.80x
CBOE’s equity volatility index (VIX): 11.5x — The S&P’s 65-dat rolling volatility is at a record low (this typically occurs ahead of a corrective phase)
Market Vane Bullish Sentiment: 68%
Forward P/E multiple: 18x; and the trailing is at 21x — in the top quintile of historical valuations
Investors Intelligence Sentiment: 61.8% bulls; 17.6% bears
The 14-day relative strength index has moved to 77.4, above the 70 level widely viewed as being an “overbought” threshold
The S&P 500 has now gapped up nearly 8% above its 200 day moving average, another sign of an overextended stock market.
Earnings expectations have significantly lagged market price action — in fact, according to S&P Capital IQ data, analyst EPS projections for 2017 have actually dipped a little to $130.31 from $131.02 three months ago.
The S&P 500 has already climbed above year-end targets for well over half of the Wall Street strategists out there.
Let’s unpack a couple of these.
Rosenberg’s first, second, fourth and sixth reasons all confirm that there is more bullish sentiment out there than bearish sentiment. Contrarians will argue that this pendulum will swing back, bringing stocks back with it.
Sure, the CBOE VIX (^VIX) — Rosenberg’s third point — is low, but Citi’s Tobias Levkovich has done extensive work debunking what a low VIX is actually signaling. Also, read Myles Udland’s reporting on why volatility has vanished.
The forward P/E multiple — Rosenberg’s fifth point — is indeed high. But many analysts will argue that’s the case because earnings expectations — Rosenberg’s ninth point — are artificially low.
Speaking of analysts, it may be the case that the S&P 500 is well above most strategists’ year-end targets. But these one-year price targets rarely prove to be accurate.
Having said all that, should you as an investor be worried about the stock market? Absolutely! Embrace the fear.
But you gotta remember three things: 1) there’s never a sure thing when it comes to the market, even when you have 10 reasons to support an investment thesis; 2) these feelings of discomfort and doubt are part of investing; and 3) even Rosenberg will tell you that making money in the the stock market is about time in the market, not timing the market.
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Sam Ro is managing editor at Yahoo Finance.
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