Weekly Market Outlook – You Can’t Fight The Tape...Until You Can

S&P 500 Daily Chart, with VIX

Source: TradeNavigator

There are problems with this momentum though, particularly given this context. Namely, the market's overextended and ripe for a pullback, and we're seeing clues that one could be near.

See the shape of Friday's bar? It's a doji, where the open and close are not only virtually the same, but in the middle of the low-to-high range. This is a subtle sign that transitional equilibrium has been met, meaning the point where net-bullishness is about to pivot to net-bearishness (or vice versa) is here. That fact that the VIX is so low is another red flag, although the longer-term daily chart of the S&P 500 (below) puts this in a better perspective.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

This view shows us the incredible 91% advance from last March's low, which has been a fun ride, but has arguably been too much. As of Friday the index lies 16.1% above its 200-day moving average line, which is - historically speaking - an unusual degree of divergence that's tough to sustain. This bigger-picture look also shows us how close to an absolute floor near 11.5 the VIX currently is, now that it's broken below a floor (blue, dashed) near 20.0.

There's another problem for the broad market, using the S&P 500 as our proxy. It's overvalued. As of the latest look based on Q1's estimated earnings, the index is trading at a trailing twelve-month P/E of just under 28.0.

S&P 500 Weekly Chart, with EPS, P/E Ratio (past and projected), and Growth Rate

Source: TradeStation

Yes, the "trailing" includes a tough second quarter of last year, when the world was still figuring out how to cope with COVID-19. Earnings are still recovering too, and perhaps more so than usual, traders should focus on the future and not the past. Even by those standards though, valuations are rich.

The S&P 500 is presently priced at 23.2 times earnings for the next for quarters, and 21.0 times 2022's projected profits. Both are also above long-term norms, even though by the end of 2022 the adverse impact of the coronavirus contagion should be completely out of the way.

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