Day Hagan Research Update

DAY HAGAN RESEARCH UPDATE

GOING NOWHERE FAST

SUMMARY

Overall, the markets continue to tread water as news stories create short-term gyrations.

WRITTEN BY

Neil Leeson

POSTED

April 7, 2017

SHARE

Nearly all of the major equity market indexes have traded within narrow ranges over the past few weeks. The bottom of the respective ranges are typically supported by 50-day moving averages, while the top ends of the ranges (resistance) are typically marked by the corresponding levels hit on the day that the S&P 500 made all-time highs back in February. Lately, we've noted that many analysts are declaring that "internal momentum" has faded. As shown on the chart below, we, too, have been aware that there is evidence that demand has slowed relative to supply. However, we are far from ringing the alarm bells at this time. The spread between demand and supply is still supportive of further gains ahead, but warrants close monitoring for the next several weeks.

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

In addition to price resistance, I continue to feel that much of the market is capped by valuation resistance. As shown on the chart below, the S&P 500 Median Price/Sales Ratio has reached lofty extremes relative to historical measures. It's hard for fundamental investors to buy a market that's this expensive.

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Confirming the message from the Price/Sales ratio is the S&P 500 Median Price/Earnings ratio. It is also at levels declaring overvaluation. The analysis at the bottom of this chart suggests that a fairer value for the S&P 500 lies between 1666.72 and 2176.07 (current level is 2358).

Price Move of:

  • -7.9% to Overvalued (+1SD) = S&P 500 Level of 2176.07
  • -29.5% to median Fair Value = S&P 500 Level of 1665.72
  • -51.1% to Undervalued (-1SD) = S&P 500 Level of 1155.37

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Longer-term volume measures and analysis (below) suggest that investors have become fairly complacent and less enthusiastic about this market in 2017. While low volume levels may be treated as a minor indicator, historically, the markets have performed much better on higher volume (participation).

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

As you know, we continue to monitor sentiment measures. And while the shorter-term measures we focus on have given us a shorter-term pessimistic reading (typically bullish), longer-term sentiment measures remain stubbornly optimistic (indicating caution). However, this disconnect in sentiment has typically been positive for the market (below), so we remain with a bullish tilt as well.

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Another factor that may be keeping a lid on the market is seasonality. As shown on the table below, we are getting closer to a seasonally weak period (summer months) for the market. While we do not invest based on seasonality, we are well aware of periods of seasonal weakness. If we start to see improved company and economic fundamentals in the coming weeks, seasonal weakness may offer the buying opportunity for which we are looking.

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

The chart below is a good illustration of seasonal weakness in the summer months since 1980.

Seasonality Explanation:

NDR's seasonality score is based on the historical performance of an ETF on a month-to-month basis. The score is calculated by ranking the average monthly performance of the ETF in any given month. This is done based on the range of monthly gains/losses. Scores range from one to five (1 to 5), with 5 being the strongest and 1 representing weakest months.

  • 5 = Strongest Seasonal Months (Bullish)
  • 4 = Second Seasonal Strongest Monthly Returns
  • 3 = Average Market Gains, No Seasonal Advantage (neutral)
  • 2 = Second Weakest Monthly Returns
  • 1 = Weakest Seasonal Months (bearish)

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

While the domestic markets tend to experience weakness in the summer months, the analysis does not play out in many foreign markets and regions. The seasonality chart for IEMG, the iShares Core MSCI Emerging Markets ETF, shows quite a different seasonal profile than the domestic seasonality chart shown above.

Seasonality Explanation:

NDR's seasonality score is based on the historical performance of an ETF on a month-to-month basis. The score is calculated by ranking the average monthly performance of the ETF in any given month. This is done based on the range of monthly gains/losses. Scores range from one to five (1 to 5), with 5 being the strongest and 1 representing weakest months.

  • 5 = Strongest Seasonal Months (Bullish)
  • 4 = Second Seasonal Strongest Monthly Returns
  • 3 = Average Market Gains, No Seasonal Advantage (neutral)
  • 2 = Second Weakest Monthly Returns
  • 1 = Weakest Seasonal Months (bearish)

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

In sum, domestic sentiment, breadth and trend measures remain neutral at best and haven't really shifted positive or negative over the past several weeks. In addition to these major factors, we continue to monitor ancillary factors like seasonality to ensure that we stay on the right side of the move and historical measures. Finally, I will leave you with the Ned Davis Research Group's 2017 cycle composite to ponder. We do not consider this a timing indicator, but we do like to keep an eye on historical trends.

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Have a wonderful week,

Neil Leeson
Day Hagan Investment Committee Consultant
Day Hagan Asset Management

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM, accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM's past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

Day Hagan Asset Management and Mutual Funds ©   |  Disclosures  |  Site Design by Lee Towle Designs