As share prices in the U.S. soar to new records, key indicators of heavily overbought conditions suggest that a major selloff is looming in the upcoming weeks, according to Matt Maley, equity strategist at Miller Tabak Asset Management LLC, in a column for CNBC.
Specifically, Maley notes that the weekly relative strength index (RSI) for the S&P 500 Index (SPX) has reached 83.4, far above the level of 70 where an overbought situation typically is registered. Additionally, Maley writes that the S&P 500 is about 25% above its 200-day moving average, very close to where it was in 2007, when the last bear market got underway.
The Dow Jones Industrial Average (DJIA) is up 25.5% for the year-to-date through Monday's close, while the S&P 500 has gained 20.2%. The respective forward P/E ratios for these market barometers are 20.09 and 19.82, per The Wall Street Journal. While Maley notes that investor enthusiasm over the progress of tax reform in Congress is driving much of the recent run-up in stocks, he sees a high likelihood of a "sell the news" reaction once the bill actually is passed.
Based on RSI analysis of the Select Sector SPDR ETFs, those with overbought conditions (RSI over 70) are, as of December 18, per MarketVolume.com, Consumer Discretionary (XLY) and Financials (XLF). Industrials (XLI) are just below the overbought level.
While U.S. stocks are overdue for a correction of 10% or more, this does not mean that investors should anticipate the start of a full-fledged bear market, let alone a repeat of the 2008 financial crisis, writes Chip Workman, president of The Asset Advisory Group, in another CNBC column.
Workman defines a bear market as a retreat of at least 20% that lasts at least two months. Moreover, he notes that broad-based pullbacks or corrections are less frequent than those which hit a particular asset class, sector, industry or country at a given time. For example, he says, big retailers have been a troubled sector this year even as the broader market advanced steadily.
In pointing out the difficulty of timing the market, Workman notes that the best quarter for each of four broad asset classes since 2001 has been the second quarter of 2009. These asset classes are U.S. stocks, developed market stocks, emerging market stocks, and global real estate. The financial crisis bottomed on March 9, 2009, but no one could know that, except in hindsight. Investors who limited their losses by selling before the market hit bottom faced the question of when to get back in. The same problem exists today, Workman reminds readers.
Writing for CNBC that "in the long run, markets will provide a reasonable return for the risk taken," Workman advises investors to understand their tolerance for risk, and to select that asset allocation that is "well aligned" with it. Indeed, he believes that choosing the correct asset allocation given one's risk tolerance is perhaps the most crucial decision that an investor can make. In closing, he says that investors "must be disciplined both in our approach to rebalancing portfolios and in our willingness to stay invested."
More Gains in 2018
Meanwhile, a bullish case for the S&P 500 rising more than 11% to 3,000 in 2018 was offered by Steve Chiavarone, a portfolio manager at Federated Investors, in remarks to CNBC. Just a month ago, CNBC notes, he had a price target of 2,750. Chiavarone now tells CNBC that the prospects for continued earnings growth in 2018 are strengthening, partly given that the tax bill now up for a final vote in Congress makes corporate tax reductions effective in 2018. Moreover, he observes that double-digit earnings growth was achieved in 2017 "without a dime of stimulus," and that "underlying trends in the economy are good." He calls tax reform and deregulation "add-ons" that make the outlook even brighter. He does not expect a recession until 2020 or 2021.
Chiavarone told CNBC that he projects EPS of $150 for the S&P 500 in 2018, making the case for 3,000 based on its multiple holding at around 20. Strategists at JPMorgan also have a target value of 3,000 for the S&P 500, based on similar assumptions. (For more, see also: JPMorgan Picks 10 Stock Winners From Tax Reform.)