Since May 14, 2015 when the S&P 500 closed at an all-time high of 2122.17, the S&P 500 has crossed 2120 level 14 more times. In all occasions after crossing 2120 sellers step in and brought the S&P 500 down. On Friday, the S&P 500 closed at 2119.12 and today again the sellers are back. Why does the S&P 500 keep hitting a wall at 2120 and what can we learn from this?
This weekend’s issue of Barron’s “Mid-Year Roundtable” (the Roundtable reports released in January and June) is excellent timing to find out what top portfolio managers from mutual funds, private equity, and private advisory firms are thinking. The following are quotes that fairly represented the tone of most of the respondents (1):
Mario Gabelli, “I said in January that the stock market could be up zero to 5% this year, and nothing has really changed. The market won’t finish the year much higher than it is today.”
Jeffrey Gundlach, “We talked in January about getting a buying opportunity in stocks during the year. It happened on February 11, when the stock market bottomed. We could get another opportunity later this year.”
William Priest, “We look for the market to muddle through . Downside will be restricted to 5% to 10% in the worst case, and upside could range from 5% to 7%.”
Brian Rogers, “Growth is challenged all over the world. In the second half , we could see more of the same. It is hard to see what leads to an acceleration in the US economy.”
Scott Black, “Consensus estimates for 2016 S&P 500 earnings were $126 in January. They are $114.76 now. That implies a price/earnings ratio of 18.3 – expensive on historical basis. The Russell 2000 [small-cap index] is even more expensive, at 23.7 time expected earnings.”
Meryl Witmer, “Today, there aren’t tons of bargains. I expect the market to be flat between now and year-end… We have a good amount of cash because when stocks reach our sell targets, we sell.”
Felix Zulauf, “Almost all asset prices are high historically, due to extremely low interest rates. All forms of carry are compressed. Also, the business cycle has been distorted by the manipulations of the authorities, central banks in particular. The risk is high and rising that something will go wrong in the world economy.”
With all this doom and gloom one would wonder who’s buying stocks? Clearly the top portfolio managers are not forecasting a robust second half of 2016 and would indicate they are not loading up their portfolios with new buys.
One explanation may be the institutional portfolio managers are merely trading the portfolios and why the S&P 500 can’t seem to break through and hold above 2120. Our analysis is that institutional managers are not buying for the long term but for short term profits. In April and May every time the DJIA had a 200 point rally the very next day the DJIA sold off and erased the prior day’s gain. More evidence that institutional managers are not buying to hold but simply making quick profits.
WHAT DOES THIS MEAN TO ME?
Paying attention to how institutional managers are investing is an insight to the stability of current prices and potentially the direction of the market. At this juncture it appears that institutional managers have a mild to bearish view on the second half for stocks. Recent rallies are quickly followed up with profit taking. Should the S&P 500 break and hold above 2120 with higher trading volume (an indication that institutional managers are buying) then it would be a positive indicator for the stock market. However, if managers are bearish and not investing for longer term holds then there is greater risk than reward in stocks. This Wednesday the Federal Reserve releases their interest rate policy regarding changes of the discount rate (widely expected to be no change decision) and next week the UK votes on staying or leaving the Euro (a potential major market moving event). This along with rising public and private debt, slowing world and domestic growth, and the fourth consecutive declining quarter of US corporate earnings it is understandable why managers are cautious. We suggest the same. Until institutional managers are aggressively adding to their portfolios which will be indicative by US indices are breaking through and holding new highs we remain conservative with our portfolios.