10/28/2013 7:45 PM ET|
Ride this market's last-gasp rally
With Fed money still rolling in, look for another six weeks of gains as a market that’s already advanced 25% this year melts up. Then get ready: A meltdown could follow.
Are we looking at a yearend "melt up"?
I think the odds are good -- very good indeed -- that we’ll see one of those big, all-animal-spirits-on-deck upward moves in U.S. stocks from now until at least mid-December.
That's assuming the markets get past this week’s Oct. 30 meeting of the Federal Reserve’s Open Market Committee without a move by the U.S. central bank to cut back on its $85 billion a month in monetary stimulus. And I think this is a relatively safe assumption after Monday’s report of a very disappointing 5.6% month-to-month drop in pending home sales in September.
Given that, I think the Standard & Poor’s 500-stock index ($INX) could easily break 1,850 within six weeks; up from a close of 1,760 on Friday, Oct. 25. That would add another 5 percentage points of return to what is already an extraordinary year for U.S. stocks. As of Oct. 25, the year-to-date return for the S&P 500 was 25.4%.
But an end-of-the-year melt up wouldn’t be all good news for traders and investors. Because it could be a last hurrah.
Melting up, then melting down?
As the term implies, with its echo of “melt down,” stocks can fall hard after a melt up.
In a melt up, valuations run far away from any fundamentals in the economy, the market or individual stocks. A melt up is driven by momentum, as investors who have profited from the market’s gains greedily chase more and as investors who have been on the sidelines decide that they can’t take missing out any longer and join the party. Worries about risk go out the window, and often it’s the riskiest assets that climb the fastest. In a melt up, the last of every group of investors except the permanently bearish throws in the towel and finally puts cash into the market.
A melt up can be the last blowoff before a market dive.
“Can be” is, of course, the key problem. Melt ups don’t have to end in corrections or market dives. Best-case fundamental wishes can turn out to be true and provide support for valuations at exactly the right time. Extravagant hopes for the future can yield to even more extravagant hopes. Markets can calmly go through a period of consolidation rather than dropping to support levels.
Let’s start at the beginning and work through the important points one by one:
Why does this look like a melt up to me? What could make the difference between a dive, a consolidation, and a further extension of the rally? And what should you be doing now?
Almost everyone is a bull
Let’s start with sentiment indicators that say it’s very hard to find a bear right now.
The American Association of Individual Investors Sentiment Index for the week ended Oct. 23, for example, shows 49.2% of respondents are bullish -- that’s up 2.9 percentage points from the previous week. More impressively, bearish sentiment is down to just 17.6%, a drop of 7.3 percentage points. The long-term average for bearish sentiment is 30.5%, by the way.
It’s hard for a market to keep climbing when all the bears have already thrown in the towel and put their money to work on the bullish side.
Other indicators of sentiment, along with data on investor cash levels, show a similar picture of investor enthusiasm. Margin debt, money borrowed to buy stocks where the loans are secured by the value of the stock, hit a 54-year high in September at $401 billion. (The New York Stock Exchange only releases data at month’s end, so we don’t know what has happened to the total in October.) Margin debt as a percentage of GDP does not quite match the peak of 2007, but it’s in the neighborhood of previous peaks, according to Deutsche Bank.
You can see signs typical of a melt up by tracking the rise in popularity of riskier assets. For example, mutual funds and ETFs (exchange traded funds) that invest in junk bonds are popular again. Weekly flows into junk-bond funds have tripled to $2 billion, according to Lipper. That has taken total cash flow for the year back into positive territory after investors moved out of the category earlier in 2013.
Or take the willingness of Wall Street to buy what are called covenant lite loans. These corporate loans carry few covenants -- rules, for example, requiring borrowers to meet specific credit ratios or limiting the amount of additional debt borrowers can take on. Covenant lite loans had climbed to 54% of all loans this year as of September, according to Standard & Poor’s. That’s a record.
Can the rally keep rolling?
So what could keep this melt up from ending badly -- that is, in a dive or a correction? (And remember that this market hasn’t seen a 10% correction since December 2011.)
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Don't look to or at Wall Street for the signs leading to the correction. Anybody notice that Arby's latest coupon has the former 2 for $5 sandwiches priced at 2 for $6 now, but half the size they used to be? GMO milk is $3 per gallon on sale and hamburger is up 30% from this time year. The new car lots were mighty lean over summer but they're stocked to the fences now. Retailers removed racks and have the clearance down-played but not forgotten. A recent article here suggests higher rental rates. Flippers, investors and REITS all have tremendous inventory but a lot less cash flow than they can endure a downturn with. The single most important aspect-- NO job recovery. College tuition is UP, enrollment is down and a whole of us aren't intending on getting a degree at all. Plenty of people are going solo for all the wrong reasons... so no real growth in families- the glue that holds communities together. Today is 10/28 and retailers already have Halloween gimmicky stuff priced for clearance. The candy stock isn't depleted at all.
Who gives a crap about the Fed and Bernanke. Is there anyone left on Earth that isn't a victim of the dilution it's caused? Let's not leave out the NSA non-revelation. The EU is pissed about the tapping of phone calls. It wants the same treatment we give to closer allies. THOSE countries likely haven't uncovered their taps yet! We tap phones to pick-up on terror plots. Isn't phone tapping- terrorism?
You tell me-- has technology helped or hurt us? People can't dig a hole without looking it up on You-Tube or Google to see how it's done. The two greatest commodities on Earth-- commonsense and fresh water. Both exploited and abused. I DO NOT see a crash ahead. I see a total deflation of all bubbles at once... and a whole lot of Kool Aid addicts absolutely clueless about where the next hand-out and instructional e-mail is coming from. No ability to free-think. This was a dead-end.
Nightmare on Wall Street will make a good horror film when the stimulus dries up.
This market has been made up of BULL sheeeeeet for over 10 years.
the market is up 165% since the low point in early 2009. just how greedy can you be to try to "ride the rally" at this point?
a fool and his money .....
From the Merriam-Webster Dictionary
Greed noun \ˈgrēd\ : a selfish desire to have more of something (especially money). Example: Risking your gains from a seven sigma tail event in the markets created artificially by money printing by the Federal Reserve (aka counterfeiting) for a chance to earn another 1% on your investment and hopefully be one of the few to get out just in time.
I have a good idea of where the money is going to go... right into Main Street, and it will cause TREMENDOUS HYPERINFLATION... That money HAS to go somewhere, because it's not going to stay on Wall Street forever... anybody who thinks that ALL that counterfeit money will stay on Wall Street DOES NOT know their history
"I have a good idea of where the money is going to go... right into Main Street, and it will cause TREMENDOUS HYPERINFLATION... That money HAS to go somewhere, because it's not going to stay on Wall Street forever... anybody who thinks that ALL that counterfeit money will stay on Wall Street DOES NOT know their history"
Read my top post again. Right now, Main Street has struggling enterprises operated by exhausted entrepreneurs. The Next Gen that would be recipients of the flooding cash- have to look up 'digging a hole' on You-Tube. Righteous women enterprises don't go anywhere... texting and answering e-mails while delegating- isn't enterprise. "That money has to go somewhere". Why? If real money is $50-60 Trillion worldwide and there is more than $1 Quadrillion stuck in instruments and investments, there's more likelihood of evaporation, than movement. Closing in on 10,000 posts on here. READ correctly. History says-- fake money never goes anywhere. France didn't have Francs redistributed after the Revolution. In fact, Napoleon's Louisiana Purchase sale created the cash he used to restart the nation. People burned post-Depression dollars. Coin Shops sold defunct foreign coins in bags as a novelty.
What happens next? We crash. Assets and Obligations default. LOOK at Detroit. Is it resolving? Is it possible to resolve without destruction? Nope. Somebody took what they didn't earn. Somebody earned but got nothing. Promises were made and not honored. The rich won't relinquish what they convince themselves they own. The victims won't tolerate that. Lawyers are NEVER peacekeepers.
Of course we can't comment on that one.
And how much did we lose lending money to the big banks? 0. In fact we made billions.
A 9.7B expense to get obo re-elected. My butt hurts.
All I have to say is, be ready for the big crash. The dollar will be worthless and there will be MARSHAL LAW!
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