Volumes are soft, price to earnings are high, and trading is quietly positive. Could all of this represent the calm before the storm.

Volumes

Market volumes have been fairly suppressed over the last 8 years. Trading volume of the S&P 500 are running at about 2B shares a day since the beginning of the year. During the 2000’s average volume ran at 2.8B shares per day. Surprisingly, in terms of the current expansion, volumes are up since the election of President Donald J Trump. Pre-elect volumes were running at an average of 500M, a quarter of their current level.

Price to Earnings

The price to earnings ratio is one way to calculate the valuation of the S&P 500. While the current P/E ratio is nowhere near as high as what it was during the tech bubble, it is well above the long-term average P/E. It’s elevated level means that prices are much higher than the forward projected earnings. One of two things will eventually happen, earnings will catch up to price increases or prices will retreat to even out to earnings.

Market Highs

Markets have climbed and climbed throughout 2017. This climb has made record closes seem common place for the S&P 500. Records are broken all the time and do not mean that prices are due to retreat.

Conclusion

Each of the items discussed individually would not make for a correction in equity prices, but all three in concert could mean that we are seeing extraordinary highs that may result in a pullback. Earnings season will likely dictate market direction for the next month. Once completed, attention will turn to headlines which may cause short-term damage.

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