Two Indicators Say the Stock Market Has Room To Run

Ivan Martchev  |

iStock.com/MichaelSvoboda

We are at all-time highs in the S&P 500. At various points between 2000 and 3000 on the S&P 500, many investors asked how high we could possibly go and tried to raise cash at precisely the wrong time, trying to “top-tick” the market, if you will. For the record, I do not believe “top-ticking” the market can be done.

Let me explain.

Experienced traders say that “a market top is a process, while a market bottom is an event.” Translated, that means stock market tops typically take about six months to a year to form, while stock market bottoms happen suddenly, after a bear market that ends with a climactic sell-off, after which the index may never revisit those lows again. Do you remember the “666” low on the S&P 500 on March 9, 2009?

The present stock market action does not look like a top to me. We have seen a series of higher lows in the S&P 500 and the Dow Jones Industrial Average, after which we made fresh all-time highs. Given the many uncertainties outside the market – including the Chinese trade negotiations, the impeachment circus in Washington, and the slowing global economy – I can understand why investors are worried. Still, here are two tried-and-true indicators that say this stock market has some room left to run.

Click to enlarge

The Message from Junk Bonds and High-Beta Financials

In my experience from over 20 years in the fascinating world of finance, junk bonds are smarter than stocks, since they reflect actual cash flows. Coupon interest is an obligation while a dividend is at the discretion of the board of directors. Therefore, the riskier the obligations – like those that come from lower-quality junk bonds – the more sensitive they are to an improving or a deteriorating economy. By the looks of what junk bonds are doing, the economy does not look to be deteriorating.

Click to enlarge

Junk bonds have to be considered on a total return basis, as their coupon interest is a huge part of their overall return. The largest junk bond ETF by assets, namely the iShares iBoxx $ High Yield Corporate Bond ETF [ (HYG)], has $18 billion in assets. This ETF has a yield of 4.8% as there are many types of junk bonds that are included in it, with a preponderance of intermediate and short duration junk bonds in its portfolio centered on BB and B credits.

Click to enlarge

Please note: Some confusion arises when some quotation services include a chart that does not cite the substantial yield of the ETF, while others, like StockCharts.com, produce a default chart that is adjusted for the substantial yield of the ETF (which is more like a total-return chart). If an investor does not realize that he or she is looking at either a “total return” chart or a “price only” chart, it can be very confusing, since the 4.8% yield is a major driver of the total return. My default view in StockCharts.com for HYG (above) is a total-return chart, while other quotation services will chart HYG with a default view without the substantial dividend yield. To see the difference, one can place an underscore in stockscharts.com before the HYG symbol like “_HYG” and get the price only chart. The difference is staggering.

A total-return chart of HYG is near a 52-week high and seems to be headed higher.

Also, if one looks at junk bond yields as a spread to Treasuries, the way professional bond traders do, the BofAML US High-Yield Master II Option-Adjusted Spread closed October at 4.15% (415 basis points). This is very low by historical standards. To anticipate a recession, it would be much higher.

Click to enlarge

In the summer of 2011, during the depths of the eurozone crisis, and in the early months of 2016, due to the sharp Chinese economic slowdown at the time, the spreads rose to nearly 8, double the present level of credit spreads on the master high-yield index, as we had a much weaker U.S. economy. In other words, if the stock market makes at all-time high in a good economy after it has had little progress in nearly two years, like it is doing at the moment, one should probably look for it to make some more progress.

Click to enlarge

Also, there is an indicator that has no scientific value but does a pretty good job of capturing the animal spirits in the stock market. Goldman Sachs(GS)] is arguably the best-run Wall Street firm whose stock is significantly more volatile than the S&P 500. When the overall stock market is doing well, the stock of Goldman tends to do well also, and vice versa.

I have never seen a situation where the stock market has been under pressure for some time and seen Goldman’s share price to be in good shape. The stock has made a series of higher lows over the past year, which typically is an indication of institutional buying on dips. Institutions don’t buy high-beta financials if they are not bullish about the prospects of the economy and the stock market.

___

Equities Contributor: Ivan Martchev

Source: Equities News

DISCLOSURE: Navellier & Associates does not own GS in managed accounts and our sub-advised mutual fund. Ivan Martchev does not own GS in personal accounts.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer. The author of this article, or a firm that employs the author, is a holder of the following securities mentioned in this article : None

Companies

Symbol Name Price Change % Volume
GS Goldman Sachs Group Inc. (The) 219.43 0.11 0.05 1,483,216 Trade
HYG iShares iBoxx $ High Yield Corporate Bond ETF 86.68 -0.05 -0.06 14,976,104

Comments

Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     
BA

     
WMT

     
DIS

     
GOOG

     
XOM

     
BRK.A

     
FB

     
JNJ

     
WFC

     
T

     
NFLX

     
TSLA

     
V

     
UNH

     
PG

     

Blockchain in Healthcare - Discussion at the EU Parliament

From the recent Blockchain For Europe Summit in Brussels: Panel on Digital Health - How Blockchain technology can make health care systems more patient-centric and sustainable