Is the US S&P 500 (SPY) Due For A Correction?

- April 15, 2017

Is the U.S. S&P 500 due for a correction?  The U.S. stock market has been in a Bull Market since April 2009. That makes this bull market 8 years old. Many commentators are saying we are due for a pullback, so I thought I would take a look at some data to get a view of what may happen next.  It looks like this article is just in time as the markets have began selling off.

The S&P 500 is an abbreviation for the Standard & Poor’s 500 or the ‘The S&P’.  It is an American Stock Market Index most commonly used to measure the US Stock Market.  The index is based on the market capitalization’s of 500 large companies. These companies are spread across a number of sectors and industries, so it is a good indicator of the rest of the Market. The companies are listed on the NYSE or NASDAQ.  You can’t actually BUY the S&P 500 , however with a handful of ETF’s you almost can.  For Example, You can buy the SPY, SPX or the VOO to name a few.

                

                                              S&P graph 1980-2017

Source

Data that supports that the US S&P 500 is currently overvalued

  •  The graph of the S&P 500 above shows a sharp rise above the long term trend time, suggesting the U.S. market is overvalued.
  •  The current US S&P 500 historical PE is 20.78, which appears high compared to the 100 year average PE which is around 15.

The Buffet value indicator – Market cap to GDP

We can see below that the Buffet value indicator is currently very high, but not quite as high as it reached in January 2015, not long before the 2015 and January-February 2016 Brexit stock market selloff.  Certainly it is higher than 2007 peak before the GFC (Global Financial Crisis)  Therefore, the indicator definitely shows signals we are in overvalued territory.

Source

What do the forward indicators suggest?

Dow Jones Transport Index (DJT) is a good US leading indicator.  This index tells us how the US transport companies such as shipping, rail and air are doing.  It is a good early indicator if the USA economy is slowing.  In 2007, the DJT peaked in July.  This was about 6 months before the GFC began.  The DJT had been steadily increasing since Feb 2009 (close to the stock market bottom of the GFC around April 2009).  It recently peaked at 9,639 around March 1, 2017 and has since declined 7.9% to 8,874 by April 14, 2017.  Should the decline exceed 10% the case for a U.S. stock market correction gets stronger.  For now some warning bells are ringing. Gold prices have just reached the highest levels since November, 2016.

DJT index 10 year graph

 

Source

US Retail sales

However, its not all bad news. US Retail sales were forecast to rise as we can see from the graph below. This is a positive sign for the US.

Source

US GDF is forecast to rise as we can see from the graph below. This is also a positive sign for the US.

Source

Conclusion

There is little doubt that the US market is currently overvalued as indicated by several measures including the long term graph, the historical PE and the Buffet Value Indicator. Forward indicators are mixed with the transports recently down about 8% from their high, and a positive outlook for US retail sales and US GDP.

Added to this we have a new pro-growth President, and increasing geo-political concerns (Syria, North Korea, and the Arabian states).  It looks like it is time to take some profits, lock in some gains, and build some cash.  No need to abandon the US market completely, just pull back and adjust your asset allocation to build in some safety.

No-one can predict when the next US correction will come, but it looks likely it will happen in the next 2 years or sooner and it may be around a 10-30% pull back

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One Comment

  1. Eddy Parton
    Posted April 15, 2017 at 1:15 pm | Permalink

    D

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