Does The S&P 500 Deserve A 20 PE Multiple?

We rarely mention near term stock action unless it has been extreme. This market is the polar opposite of March. The financial media went from discussing a potential depression to discussing why stocks shouldn’t fall despite civil unrest and the highest unemployment rate since the Great Depression. Every day, like clockwork, the S&P 500 futures market rises early in the AM. The cash session, which is the normal trading session maintains the gains. This is the opposite of March when futures would often limit down 5%. This is the opposite in every way because the size of the moves are smaller and much more consistent.

We must wait until Thursday to discuss the NAAIM exposure index. It was at 81.65 on May 27th which was the highest reading since before the crash. When it gets above 90, it’s a sell signal. We expect it to do that since stocks have rallied 4 days in a row. It’s completely wrong to say this is a hated rally. Sentiment and positioning were bearish in March, but that has changed. The criticisms are high, but actual investors are putting money to work. The chatter doesn’t matter. Only dollars matter. The S&P 500 is up 11 of the past 14 days. There is no question where the dollars are headed. Money is flooding into U.S. stocks as the put to call ratio recently fell to 0.46, the CNN fear and greed index hit 58 which is greed, and the net fund mangers’ positioning in U.S. stocks is over 25%.

The Market Is Expensive

Valuations don’t act as a catalyst, but they do matter. Stocks likely would have fallen this winter anyway because sentiment was so extreme and valuations were high. The NAAIM index in December hit 98.9 out of 100. There were several readings in the 90s as the market stayed overbought for longer than usual. Obviously, the uncertainty that COVID-19 brought amplified the decline in stocks. Somehow, the market is already back to being considered expensive even though the economy hasn’t come close to recovering.

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