A Favorite Bullish Indicator For Stocks Is Still Flashing Green

A bullish indicator gives investors more confidence to buy or hold a position. There are many variables to track when making an investment decision. However, this bullish indicator has been flashing green since 2Q2020 and is still flashing green today in 2021.

As I was updating my post on helping people decide whether to pay down debt or invest, I was reminded about the S&P 500 dividend yield versus the 10-year Treasury bond yield.

Take a look at the chart below that shows the ratio of the S&P 500 dividend yield to the 10-year treasury yield. The ratio skyrocketed because the 10-year bond yield has plummeted, yet the S&P 500 dividend yield has remained relatively steady between 1.8% – 2%.

A Bullish Indicator Flashes Green

The first time the S&P 500 dividend yield yielded more than the 10-year Treasury yield was back in 2009. As we now know, buying stocks in 2009 proved to be a phenomenal time to buy stocks (and real estate).

When the above chart was published on 4/30/2020, it also proved to be a fantastic time to buy the S&P 500. If you did not read my post on March 18, 2020 calling the stock market bottom, you could have paid attention to the S&P 500 dividend yield to 10-year yield ratio. On 4/30/2020, the 10-year bond yield was at ~0.65%, which means the S&P 500 yield was at ~2.1%.

Today, the 10-year Treasury yield is at ~0.85% and the S&P 500 dividend yield is at ~1.8%. Therefore, the ratio has come down to 2.1 from over 3. Despite the lower ratio, anything above 1 is still considered a bullish indicator.

Why Is It Positive When The S&P 500 Dividend Yield Is Higher Than The 10-Year Treasury Yield?

As a stock investor, it's always important to pay attention to the 10-year Treasury yield. The 10-year Treasury yield is the risk-free rate of return and your opportunity cost for not owning a safe asset instead.

When the S&P 500 yield is higher than the 10-year Treasury yield, investors start forsaking investing in Treasuries because the returns are relatively less attractive.

A Total Return Boost

Instead of just getting a return equal to the 10-year yield, why not take more risk? S&P 500 investors can earn a yield higher than the 10-year yield and potentially more upside through index appreciation.

A stock investor's main goal is to see capital appreciation. However, as the dividend yield gets relatively more attractive, a stock investor also starts seeing the dividend yield as a total return boost.

For example, let's say an investor expects to make a 10% return on Apple stock in one year. With Apple's 1.5% dividend yield, the investor's total return is expected to be 11.5%.

A Downside Buffer

Instead of viewing the S&P 500 yield as a total return boost, investors can also view the S&P 500 yield as a downside buffer.

For example, let's say you own the S&P 500 and are afraid of a 10% decline one year. If the S&P 500 is yielding 2% and does decline by 10%, your total loss is 8% instead of 10%.

As someone who doesn't have a steady paycheck or a working spouse, I view stock dividends more like downsides buffers. When stocks are crashing, I find comfort in the dividend to keep passive income cash flow alive.

For capital appreciation, I simply allocate capital to growth stocks that often don't pay a dividend e.g. Tesla.

A Stock Dividend Is Not Free Money

Some dividend stock investors erroneously believe that a dividend yield is free money. The reality is that every time a company pays a dividend, the value of the company temporarily declines by the amount of the dividend.

The dividend payment comes from the company's cash holdings. Therefore, a reduction in cash reduces the company's book value. To understand the concept better, it helps to pretend you are the owner of a business looking to sell.

Let's say your company has $1 million in cash and a business worth $5 million based on 5X operating profits. You have a buyer willing to pay $6 million for the company.

But if your company decides to pay a dividend to existing shareholders that drains the cash account to zero, then the buyer will rightly only want to pay $5 million at most.

If the publicly-traded dividend stock has a history of paying dividends or increasing its dividend payout ratio, then the stock will likely recover soon after paying out its latest dividend. If the dividend payment is perceived as more one-off or unsustainable, the stock will tend to trade to trade at a lower price due to the loss of cash.

How much of a company's earnings are paid out is never guaranteed. The hope of all stock dividend investors is that the company continues to generate ever-higher profits and pays ever-higher dividends.

Once a company lowers its dividend payout ratio or cuts dividends, especially if the company is considered an ex-growth dividend company, the stock is likely to languish for a very long time, e.g. AT&T.

Stock market indicator - dividend yield of S&P 500 versus treasury bond yield

Another great stock market indicator is the high-yield corporate bond spread. If the spread is low, it means bond investors believe corporations are in good health. IF the spreads are blowing out, it means bond investors are more nervous about corporations.

S&P 500 Earnings Yield vs. The 10-Year Yield

Another good comparison is to estimate the S&P 500 earnings yield to the 10-year yield.

Let's say the S&P 500 is estimated to earn $165 / share in 2021. At 3,638, the S&P 500 is trading at ~22X forward earnings. The S&P 500 earnings yield can be found by dividing the earnings per share by the share price, i.e. $165 / 3,638. Therefore, the S&P 500 earnings yield is ~4.5%.

When you compare the S&P 500 earnings yield of 4.5% to the 10-year bond yield of 0.88%, the S&P 500 looks relatively attractive as well. Whenever the S&P 500 earnings yield is at least 3X higher than the 10-year bond yield, I'm a buyer.

Bullish Indicators Abound

As the S&P 500 marches higher, its dividend yield will decline unless corporations increase their dividend payouts. As a result, the S&P 500 dividend yield to 10-year Treasury yield will also decline. But so long as the ratio is above 1, it is still a bullish indicator.

We already know that when there's a Democrat in the White House and there is Congressional gridlock, the stock market tends to perform very well.

We also know that there are at least three vaccines with high efficacy rates that will be available to everyone within six months. These vaccines should help create herd immunity and eventually get all of our lives back to normal. As a result, corporate earnings are likely to rebound.

The federal government may even pass another stimulus package rather than continue to do nothing for the millions of Americans suffering from the pandemic. However, with no elections for a while, politicians aren't motivated. They've got their power for 2-4 years and their guaranteed paychecks.

Finally, with the Federal Reserve committed to a 0% – 0.25% Fed Funds rate until 2022+, the 10-year bond yield will likely remain depressed as well. Therefore, the S&P 500 dividend yield and the S&P 500 earnings yield will likely continue to be higher than the 10-year Treasury yield.

In conclusion, with so many bullish indicators, it's hard not to get long or stay long the S&P 500. Goldman has a 4,300 year-end 2021 target. JP Morgan has a 4,500 year-end 2021 target. And many more research houses are similarly bullish.

Sure, there will likely continue to be sell-offs. We will also have to wait patiently for corporate earnings to recover. However, I think there's a 70% chance the S&P 500 will be higher 12-months from now.

bullish indicator - 2021 S&P 500 forecast

What Could Go Wrong With Stocks?

My only worry is that given this bullish investment thesis is so obvious and ubiquitous, we must be missing something. Perhaps there will be a viral mutation that makes all the vaccines ineffective. Maybe the Federal Reserve raises rates too quickly because it misreads demand. Or maybe a nuclear war breaks out.

Something bad is bound to happen. And something bad did happen in 2022! At least in a bear market it's easier to generate more passive income.

The question is whether that bad thing will cause another bear market or simply be another bump in the road. I'm willing to stay long risk assets with the majority of my net worth. Are you?

I've decided to follow my dollar-cost averaging strategy and buy any dips of 1% or more going forward.

What are some other bullish indicators you've noticed for stocks, real estate, and other asset classes? What do you think is the most bullish indicator for stocks? Join 60,000+ others and sign up for my free newsletter.

38 thoughts on “A Favorite Bullish Indicator For Stocks Is Still Flashing Green”

  1. When you wait for a dip isnt it in theory where you wanted to buy it some time ago, what actually benefit is it unless you buy when it dips 10%. Even then, when that happens you could just buy it now.
    Ive been trying to understand the logic, would appreciate your feedback.

  2. Good stuff Sam! Really inspiring to see your blog take off so much. Also regarding the post, I definitely did not know that a dividend came out of a company’s cash holdings! Keep up the great work!

  3. Sam, great post today, thanks! I’d welcome your comments on a couple of points. First, the post seems to be about getting into stocks, yet your comment replying to someone is it is hard to put much in at this level, doesn’t that contradict the point of your blog post? Second, you mention that you are 70% sure the market will be higher in 12 months. Read recently that the market goes up 77% of years, so 70% does not sound that high, despite the big projections from Goldman and others.

  4. To add to the logic around the higher potential market outcomes:

    Tim Duy at university of Oregon has some thoughts on the macro economy in his 11/30 blog worth reading blogs.uoregon.edu/timduyfedwatch/

    Low interest rates means future earnings and growth have higher value. While I’m not sold on the indicator that dividends being higher than 10yr treasury is a real thing, the fact is that all this money will have to go somewhere and that will mean people will take more risk.

    People are ready to be done with covid. We all feel it. The short term will be tough. But spring and summer will bring relief and that relief will bring an explosion of spending and excitement. That will drive the economy.

    That said, what’s more likely to perform well is the more traditionally mundane sectors of the economy. Tech upside will be limited after 2020 (it’s not 2000, but at some point the earnings will need to catch up). Value may finally see it’s day.

    We’ll see, but expect an intermediate rising tide for all boats.

  5. Hi Sam,

    Thank you for all of your writing!

    My bearish take (short-term) = sentiment is ridiculously high as of today. The backdrop for the market is incredibly bullish, but I can’t imagine that there’s much room for upside in the short-term. My hope is that we trade sideways for a bit as sentiment moderates a bit. I doubt that will actually happen however. My two sentiment indicators are: 1) the IBD bullish/bearish news letter writers 2) the CNN greed/fear index. Both are at crazy high levels of optimism.

    Perhaps most significant to me; when I suggest to others that we may perhaps have a pull back in store they almost seem to be insulted.

    I really value your experience and willingness to share it. Thanks again,


  6. ” We’ve got a supportive Fed, several promising vaccines, a strong real estate market, low mortgage rates, a ton of cash still on the sidelines, and strong hope for a better year. ”
    What we have is more speculation, hoping, betting—not investing. Investing is when you believe a product/service will increase in value BECAUSE IT IS A GOOD THING, a real thing that will really improve life in the long run.
    The markers are strong because it is the only game in town. US stock market. Where else are you going put your money, no matter where you live? And that is a poor reason to think that it is a strong market.
    Having said that, almost all my money is in the market because I have turned it over to a pro after being wrong so many times. I do have some cash, and when the next crash happens, I will use it to buy US stocks. And learn to pray.

  7. I have another bullish indicators for you. I had 2 friends as well as my wife open up Robinhood accounts during the summer. It was like fantasy football for them. They couldn’t lose. After a few weeks they were giving me stock pics! Then the little correction occurred in October. That correction was all it took to turn them off. They either sold at the bottom or quit looking at their account all together. My friend indicator is the best predictor in my trading account. When they buy I either sell or hold. When they sell I always buy.

    I’m still bullish on stocks. There’s just too much money in the system. It has to go somewhere. Treasuries, Munis, Corporates, CD”s, Saving Accounts all suck. Risk assets are the only game in town.

    P.S. Another friend sent a group text telling us to buy crypto. That guarantees a correction. :)

  8. Thank you Sam, as always for your blog. Enjoy your take as always.

    As for the bear-ish take, I do think some challenges lie ahead (although longer term)

    – Higher unemployment in the long term: I think stocks are responding to companies being more efficient with higher margins because employees laid off will not all be re-hired. Those that aren’t re-hired are likely less employable. Jobs are replaced by current workers doing more (those extra two hours of commuting now gone!), part time, or outsourcing. For those who can find employment it’s either not enough hours, pay or benefits. We hired a teacher for my son’s 2nd grade pod (pandemic school in a finished garage in LA) and she just quit. She couldn’t make it work without benefits for her own 3 kids, plus her three(!) side hustles. Affordable and available health care is a massive problem in this country that keeps those who want to work partially on the sidelines.

    – Housing gains flatten out (and smaller portion Americans benefit anyway) based on flat or slightly increased rates (nowhere to go)

    -Main Streets will be like swiss cheese: the best small businesses will remain, but restaurants and independent retailers will shrink dramatically. Now, the counter point here is real estate will be cheaper and capital is more plentiful but are people willing to take the same risk? We consumers have changed our habits, and I don’t see the frequency of nail salons, eating out, etc returning. For example, I for one was caught up in the arms race of kid’s birthday parties – all those businesses that caters to those celebrations – can they survive when we all did okay with the drive by party or return of the small in-home pizza party with a from-the-box cake? Same with gyms and other personal care categories. For me this means less attractive cities and small towns that rely on that charm.

    -Finally, my kids are Kinder and 2nd. They’ve watched their parents zoom all day. Will we have an entire generation un-interested in the post-pandemic white collar lifestyle? If I were them, I would be looking to do something fun, and in person. Coach, lifeguard, builder, electrician, landscaper are all sounding much more attractive. What happens to American GDP and productivity when our kids decide to live to work instead of the digital rat race we live in? What happens when they learn that white shoe consulting (recent McKinsey/Oxycotin news, et all) isn’t a noble career path, even though it is a path to the 1%?


    1. I’ve started talking to my 2 kids (35 and 43) about ‘job training’ and not ‘higher education’ when we discuss their kids’ futures. The white collar world has been good to my wife and me, and certain white collar jobs are honorable and engaging. But too much of it is chasing the dollar.

  9. Hello Sam, another good newsletter here as usual. Thanks much.
    Despite “Covid 19 Surge”, unemployment problems now, and unemployment $(help) they say will end day after Christmas, I’m with you that investing in stocks is still a green light. What I’m afraid of though is, IF Iran and Israel will start shooting at each other, a Bearish stock trend might start with a Sudden spiraling stall. Praying though that it will never happen.


  10. Paper Tiger

    One thing I will be watching with great interest is the senate runoffs in GA on 1/5/21. If the Dems win both seats and control Congress then I think things get a little dicey for markets in Q1 because that will introduce a new level of uncertainty and will upset the prevailing thinking that we were going to have a divided government. If the Dems get control and pursue a progressive agenda, the market is going to react, most likely in a bad way.

    1. I agree. On the bright side, with higher taxes and more restrictions, there will be no better time to retire. I’m already itching to take things down a notch in 2021+.

      I’m assuming a lot of people are given how exhausting 2020 has been.

      1. No doubt. I have the best of both worlds by being retired and having a working spouse that wants to continue to charge hard for a few more years. I would hate to be starting all over in the current environment.

  11. Hi Sam, what are your thoughts on cash allocation in this climate. thinking back to your articles on asset allocation by age – what adjustments would you make and why? Thanks!

  12. I don’t know Sam. I like your optimism about the stock market but I am afraid there will be a market correction very soon. Perhaps 2021 is the return of 2008.

    I have made a great deal of money with Covid-19 trading in my investment and retirement accounts. I will pay short term capital gains taxes because I have been getting in and out of positions in short periods. But I don’t mind. Make $$$ doing it.

    2021 will be interesting. Specially if the vaccine is a complete failure and lawsuits will pop up everywhere. Pharmaceutical companies going under, more government bailouts and more pressure on the Fed and the economy.

    Wall Street will always put a positive spin on anything. That’s what it sells.

    I am trading but getting in and out in some accounts.

    Economy Chief.

    1. It’s good to be cautious and negative. I’ve got a cash hoard waiting to pounce as well.

      The one thing I do note is that so many people have surprisingly made A LOT of money in 2020. Look at how much more wealth you have and multiply it by millions.

      Most people are surprised to be up big in 2020. As a result, it feels like free money. I think that free money will find its way more into real assets, to ensure the good times last longer.

      With so many companies working on a vaccine, I doubt there won’t be at least one to hit. The cash sitting on the sidelines is MASSIVE.

      And the general trend is for people to buy only AFTER all is clear.

      Let’s see what happens!

    2. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

      By hoarding cash waiting for a dip one is essentially preparing for corrections while missing out on potentially significant gains having invested in the market during that period.

      Some use margin if required to buy a dip if they truly believe in their investments and the long term view that the stocks eventually go up.

  13. I’m so torn. I invested religiously during each of the covid dips. It’s really paid off. Now I’m up more than I ever imagined possible. This article is awesome as usual, but even with the fancy numbers it’s extremely difficult to justify pumping more cash in while staring at record peaks. Seems like I should be pulling some the gains off the table instead. Im no expert, the opposite actually, just trying to make reasonable decisions as I attempt to gear up for retirement.

    1. It is hard to know exactly what to do. I’ve taken the approach of buying and holding for a very long time with my core portfolios, 401ks, and 529 plans. It’s easy to do so with your 401(k) and IRA money. But it’s also easier to Trade that type of money because there are no tax consequences.

      I would approach your decision based on equities as a percentage of your net worth. The higher the allocation, the more I can understand your fear.

      I do have a punt portfolio I trade more. But It’s more for fun with an inconsequential amount of money.

  14. I’ve put more cash to work and feel happy with my current portfolio exposure. I was heavy on cash in Q2 and most of Q3 but have been legging in recently. It’s hard to know what next year will look like, but I’m hopeful. It’s encouraging that there are several vaccines closer to release. It sure will be nice to have this virus beaten down with (needle) sticks everywhere! Great insights on the yields, thanks!

  15. 50% of my family are doctors, including an ER physician who was very sick with Covid. They will be required to take it, I’ll await my turn, if there are people who refuse, they can live with the consequences as long as they don’t get others sick and don’t seek help when they are dying from Covid. The great thing about the USA is that we can be as smart or stupid as we want.

  16. One clarification to my previous comment – let’s assume the pension is federal and as safe as TIPS / risk free rate, and that it comes with COLA adjustments.

  17. Sam

    An unrelated question here. Let me know if you’d rather me email you or if you’d rather do a post about this.

    Imagine you are someone with a pension that pays something like 50k / year. Let’s say we treat that as a $1M Treasury. Most people agree with the idea that is replaces the need for bonds in most portfolios (assuming you want any bond exposure).

    If you have $1M otherwise, you now arguably have a 50/50 stock/bond split. If you’re someone who wanted zero or little bonds, how do you fix that?

    There are two relatively simple and diverse ways to take more risk, in my opinion: by long call options on the S&P 500, or use margin to buy it (or the Wilshire, or an intentional index ETF).

    There are probably others, like going into alternative asset classes (commodities, currencies, etc). Those require far more knowledge and may be bad ideas, I don’t know.

    What do you think? You’re good for some heterodoxy, so I know you’re not going to jump down someone’s internet throat for asking this.


    1. What do you want to achieve? If you have a pension for life, you’ve won the lottery, especially if your living expenses are below your pension income.

      My goal has always been to sleep soundly at night with the money I have. I am no longer looking to make home runs with my mothership portfolio. That’s what my punt portfolio is for.

      With a pension, you should feel more risk-loving at the margin. (Comfortable taking on more risk).

      1. Thank you, Sam.

        What did you mean in your last sentence? I’m not catching the meaning.

        What would I be trying to achieve? Rebalancing the risk of the portfolio. That’s probably not what you mean, though.

        The goal of the portfolio is to provide a long term cushion and give the ability to supplement the pension if we want to have more of a fat FIRE in a HCOL location. The pension would easily cover the basics, but I’d probably like to be able to double it in case we want to have some bigger spending years or buy a great home exactly where we want to live.

        These things obviously assume I won’t work (bad assumption) or that my spouse won’t (she says she 100% will). In all likelihood, we don’t need to touch our money, save for purchasing a home, till we are in our 50s. But, who knows?

    2. Paper Tiger

      Hi Risk, I understand your point and have based my asset allocation on a similar view. I have a 50K a year pension and a $150K lump sum from a voluntary contribution pension invested and paying dividends as well. Payouts started 3 years ago for me. My wife has something almost identical that will start paying out on 4/1/2021. Because of this, I have allocated more toward equities than our age might dictate. I am 63 and currently about 80% invested in equities and I am thinking about increasing that another 5% to take advantage of what I believe will be a pretty good environment for equities over the next couple of years.

      My wife and I will also have very solid SS payments whenever we decide to take them. Right now we still plan to defer them until 70. I am retired but my wife still works and makes a great income and benefits, another reason we can be more aggressive with our investments.

      Like you, I view guaranteed passive income as fixed-income investments which give me more security in keeping more of our other investments in equities.

  18. lets say you want to invest more in S&P 500 now, would you recommend to do in intervals? Say once every 2 weeks or do you recommend to buy only when it drops a certain percent?

  19. I wonder how many people will decline to take a vaccine based on new technology with no long term studies. My parents, both in their mid 80s have no interest – my mother does get the annual flu vaccine, my father declines. If the vaccines begin to have significant side effects in even a small percentage of individuals might that not be the next black swan as many more will refuse?

    1. A recent Gallup poll said 42% would decline, down from 50% a month earlier. As time goes on, I think the percentage who would decline will decrease. The biggest reason is that the vaccines are rushed. Therefore, more time is desired to see if there are negative affects. I don’t mind waiting for several months after the initial doses.

      Each new person who gets vaccinated helps us all.

      1. I totally agree with you Sam. It’s easy to say you will not take before the vaccine comes out.

        But once you see others getting back to normal life when they have the vaccine – you are likely going to get the vaccine.

        It’s easy not get your child vaccinated with the polio vaccine beacause if they are not vaccinated they still likely will NOT get polio. More difficult to make that logic work when we are talking about COVID-19.

        1. The Covid survival rate is over 99% without a vaccine, that is lower than the flu for most healthy people.

          If it were are financial risk decision, and reason what used instead of fear, then almost no-one would take this vaccine.

          1. Perhaps not when you see parking garages being used as hospitals (Reno) and many cities with freezer trucks parked outside of hospitals, hospitals turning away patients, ambulances parked and waiting for beds for patients at the hospital unable to respond, hospital workers unable to work therefore staffing is low and cannot keep up with demand and ventilators rationed to the young. This is the current reality of my parents’ hometown in Texas, where many have used similar reasoning as that you have above. People are dying left and right around them. This is highly contagious, so without precautions like a vaccine, the sheer numbers of infections tap out healthcare resources and now all death rates for all conditions will go up in these areas. Please get vaccinated. Take some benadryl, claritin and tylenol to help with side effects and be thankful to be living. This will help our economy so much more than staying open. –Your friendly RN FIRE Finder. : )

  20. Evidently the messenger RNA vaccines (Pfizer’s and Moderna’s) are easy to adapt to any mutations according to their CEO’s since it is delivering genetic code as the mechanism to stimulate immune response, as opposed to inactivated virus. So that isn’t something I’m really too worried about. But inflation and the subsequent Fed response to that inflation is definitely the thing I worry most about over say a 3 year horizon.

    Economist on CNBC yesterday was talking about how stimulus has added 44% to M1 money supply, which is unprecedented amount of liquidity. In a downturn that helps keep things afloat, but coming out of the downturn, that, combined with 0% interest rates could really create an inflation problem that then makes the Fed raise rates aggressively and send the stock market into a tailspin.

  21. Julia REinvestor

    This week I had to rebalance my portfolio with a purchase of bonds, because my stocks are (unexpectedly) doing so well.

    This analysis gives me confidence to put more cash into investments. Thanks Sam!

  22. The previous time before 2009 was in the 1950s I think. So, I don’t think this is a very reliable indicator of anything. The “Fed Model” compared the E/P ratio of the S&P 500 to the 10 year yield. That had a lot of cross-overs but no predictive power apparently: en.wikipedia.org/wiki/Fed_model

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