This has been called the least believed bull market in years, but the percentage of bears is actually quite low, and statistically a sign that we could be near a market top. Despite this lack of cautious sentiment, Barclays analysts Ian Scott, Dennis Jose, and Joao Toniato think that other measures show that a correction is still a long way off, describing their position as ‘Bullish with a But’.
“On the fundamentals, valuations do not strike us as too expensive, with both the price/book and the cyclically-adjusted PE ratio near the lows of the previous cycle,” they write. “If a sentiment-driven correction were to materialize, we would view it as a buying opportunity.”
The one sentiment indicator that gives them pause, the ‘but’ in their bullish stance, is the weekly Investors’ Intelligence Survey, which had just over 16% bearish respondents last week. The survey only extends back to 2009, but in that time bearishness below 20% corresponds to flat global equity growth over the next six months.
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European equities: M&A activity, momentum outperformance aren’t signaling a market top
But they argue that other measures of sentiment and price are more restrained. M&A activity has picked up recently, but it’s nowhere near the levels ahead of the last two crashes. It’s not even that far ahead of a recent bump in M&A activity in 2011/2012. The outperformance of momentum stocks, a sign that people are piling into popular stocks without regard to price, isn’t there either.
People like to say that the current low level of implied volatility measured by the VIX shows how complacent everyone has become, but the options experts say that the VIX is widely misunderstood. Implied volatility below 15 (we’re currently around 11) isn’t associated with particularly bad three-month returns on the S&P 500, giving Scott, Jose and Toniato more reason to think that a market top isn’t just around the corner.
European equities: Stocks fairly valued according to global CAPE
“We have serious reservations about applying the CAPE measure to US GAAP-based earnings, given some accounting discontinuities. But applying the technique to global stocks slightly dilutes the effect, and the conclusions are substantially different. The global market is trading on a CAPE of 19.3, exactly in line with the average of the (admittedly limited) history shown.”
This is a common criticism of Shiller’s cyclically adjusted PE ratio, but their solution is to look at global CAPE because accounting changes in one country don’t impact the results as much. This might sole the inconsistent accounting issue, but it doesn’t tell us as much about the US market specifically. It’s also worth remembering that, while the CAPE Shiller puts the S&P 500 about 50% above the long-term average, it was never meant as a market timing tool.