The March issue of Money magazine featured an interesting article on technical indicators. It profiled three leading indicators, including the price-to-sales (P/S) ratio for the S&P 500, the NYSE Advance-Decline (A-D) line and the AAII investor sentiment survey. The P/S ratio is currently 1.6, which is 15% above its historical average. This reading often signals subpar returns for stocks ahead, according to the article: “Since 1993, in the three years following a reading of 1.6, stocks have eked out average annual gains of 1%...”
As for the AAII sentiment poll, the Money article noted that at the end of 2013, AAII “found that only 18.5% of investors were bearish, vs. a long-term average of 30.5%.” This reading has typically “delivered underwhelming returns the year after such a reading, but not losses.”
I found the article interesting in light of my current take of the market’s technical profile. While I see no outright bearish signals in the immediate term, neither do I see an abundance of “buy with both hands” signals out there. In other words, we could be in for a very pedestrian market performance for a while. Until the cycles and indicators get back into alignment it will almost certainly continue to be a stock-picker’s market where relative strength and momentum are a trader’s best friend.