Overtime

Mailtime

Good morning,

As discussed last week, we’re bringing you Mailtime one week early in order to avoid trading our ETF portfolios on election day.

Thanks to everybody who got their questions in early and participated, let’s see what’s on your fellow readers’ minds!

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Questions

Hi Scott. Would like to get your weigh in on the chart below. Definitely seems concerning how expensive the S&P looks on a P/E basis.

Valuations aren’t part of the process here at Brown Technical Insights but let me show you why. Below are the forward price to earnings ratios and forward one-year and five-year returns for the S&P 500 from the quarterly J.P. Morgan Guide to the Markets. As you can see, there is almost no correlation between the current price to earnings ratio and the market’s return over the next 12 months.

Now, you do start to see the correlation firm up if you look out five years, so I think it is totally reasonable for advisors to input lower expected returns into financial plans (better to be surprised by better-than-expected returns than worse) but for tactical investing, valuations just don’t add any value.

Do you have thoughts or see specific pockets of value within the AI theme? Is the ASML sell-off an opportunity?

I’ll take the second question first, and say that while I don’t know if the ASML sell-off will prove to be an opportunity, I’m not interested in buying it. Especially when trading high-growth stocks and popular themes, we want to own the winners and ASML certainly is not that.

Even before last week’s big sell-off, the stock was below its 200-DMA and making lower highs and lower lows. And it’s far from the only weak name in the group (LRCX, SNPS, KLAC, and AMAT to name a few) so I would be very cautious bottomfishing here.

In contrast, Nvidia and Broadcom are pushing up to all-time highs and above all key moving averages. Marvell Technology (MRVL) is another good chart within semiconductors.