Patience brings opportunity
Christopher Norwood • December 4, 2020

Stocks are short-term overbought

Patience should bring opportunity

Stocks are short-term overbought. The S&P 500 is currently trading 15% above its 200-day moving average. It is 5% above its 50-day moving average and 17% above its 400-day moving average. There are four other times in the last three years that the S&P 500 has gotten as far above its moving averages. The index subsequently corrected by an average of 20% those four times. The mid-cap and small-cap indexes are further from their moving averages than the large-cap index. 


The S&P 500 is trading at over 26 times earnings based on estimates of $137.45 per share for 2020. The valuation is around 75% above its long-term historical average. The S&P 500 is trading at more than 21 times 2021 forecasted earnings of $168.42 per share. A more normal multiple of forward earnings is around 14 times. Earnings will need to surge more than 22% in 2021 just to keep the market at 21 times earnings.


Meanwhile, the U.S. passed 100,000 active confirmed COVID-19 cases on November 6th. The U.S. has experienced more than 20 days in a row of active confirmed cases above 100,000. States are beginning to impose restrictions on activities once again. Vaccines are on the way but will not arrive in volume for at least another two to three months. Surveys show that more than 40% of those surveyed do not plan on getting a vaccine when first available. It is likely that widespread vaccination in the U.S. is six to twelve months away.



Investors can chase stocks higher. The risk is a pullback of 10% to 15% or more sometime in the next few months. Technical indicators point to overbought conditions. The economy is struggling and may contract in Q1. The stock market is expensive based on forecast earnings. It is as expensive as it has ever been on measures such as price-to-sales. Patience brings opportunity. Be patient.


Regards,

Christopher R Norwood, CFA

Chief Market Strategist

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