10/25/2013 9:30 PM ET|
Stocks too bubbly? 5 warning signs
With stocks at record highs, Wall Street is feverishly bullish. But here are a few red flags investors seem to be ignoring.
Stocks are at record highs and Wall Street is getting feverishly bullish. What could possibly go wrong?
While many analysts really don't see much that could derail the market's bull run between now and the end of the year there are some warning signs that investors seem to be ignoring.
"One of the biggest red flags out there is that there don't seem to be any red flags out there," said Paul Hickey, co-founder of Bespoke. "For every potential negative, people have a quick explanation to refute it."
For some bulls, the debt ceiling debate and government shutdown were a blessing in disguise because they pushed back expectations for a tapering of the Federal Reserve's easing program into next year, meaning lower Treasury yields and sunny skies for stocks. That and the seasonal high that usually drives stocks at the end of the year created a launch pad for optimism around U.S. equities.
We found five warning signs, though analysts say they do not mean the market will necessarily change course soon.
Investors may be getting a little too bullish and bearishness is fading fast from the market, a contrarian signal. The American Association of Individual Investors' (AAII) sentiment survey Thursday showed the lowest amount of pessimism about the market in 21 months, and the highest optimism in 10 months.
Bearish sentiment, or expectations stocks will decline over the next six months, fell 7.3 percentage points to 17.6 percent, the lowest reading since January, 2012. Bearish sentiment has fallen below its historic average of 30.5 percent five times in seven weeks.
Bullish sentiment rose 2.9 percentage points to 49.2, the highest level of optimism since January 24, and the fifth time in seven weeks that bullish sentiment was above its historic average of 39 percent.
AAII pointed out that this week's reading is very similar to January 2012. It noted bullish sentiment was above average for 15 out of 16 weeks from Dec. 15, 2011 through March 29, 2012, and stocks rose 16 percent during that period.
The S&P 500Index ($INX), up 22.9 percent this year, is now trading at more than 16.5 times earnings, just above the market average of 15.8.
"In the short term, the market is dramatically overbought. From that perspective, the market could flame out but who knows when and at what level," said Peter Boockvar, chief market analyst at the Lindsay Group. "The boat is very full, and nobody sees dramatic harm for the market no matter what. On top of the market being overbought, earnings growth is two to five percent."
Hickey said the argument in favor of rising valuations is that the low interest rate environment means stocks should have a higher valuation. "One of the most bullish arguments in favor of the market is valuation. That argument is gone now. We're not by any means at the extreme. The S&P 500 is about average now," he said.
Hickey said the price-to-earnings (P/E) ratio on the Russell 2000 is 31.8 times trailing earnings and S&P midcaps are trading at 22 times. "It's a bull market. The valuation argument isn't there anymore. Bull markets don't typically end when you get to average valuations. The reason the (S&P P/E) average is 15 is because the average bull market valuation is much higher and the bear market valuation is much lower. "
Earlier in the week, momentum stocks took a sharp and sudden hit, starting with a dramatic selloff in Netflix (NFLX), one of the hottest momentum names. It was later reported that investor Carl Icahn sold a big chunk of his Netflix stake. The selloff across dozens of momentum plays was broad as stops were triggered and shorts were forced to cover. It reminded some traders of the flash crash.
"I think that's potentially a canary for the market," said Boockvar.
He also pointed to relative strength in the Nasdaq 100. "The 7-day is now above 70," he said, a level indicating overbought conditions. Relative strength is a momentum indicator that signals overbought and oversold conditions by comparing the magnitude of recent gains to losses.
"The NDX (Nasdaq 100) is 13.3 percent above its 200-day moving average. Anything above 10 is stretched," Boockvar said. "In this kind of market you can stay stretched for longer than usual. It just tells you you're in a high risk market."
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Oh, NOW they're getting worried? They weren't worried a couple of years ago when Benny started to DUMP money by the TRILLIONS into Wall Street?
Finally, looks like the chickens are coming home to roost. And I DON'T want any reports of shock or outrage, because whether ANYONE wants to admit it or not, WE ALL KNEW THIS WAS GOING TO HAPPEN, when Benny started to pump up Wall street with FUNNY MONEY.
And for you people who want to "thumbs down" this comment, IF YOU DON'T LIKE THE TRUTH, STFU AND STOP YOUR WHINING. You KNEW this was going to happen SOONER OR LATER.
Hey, P.O. Carl
the REAL value of ANYTHING is WHAT PEOPLE ARE WILLING TO AND ABLE PAY FOR IT. THAT, and nothing else determines "value".
So if it's NOT SOMETHING that people THINK they need, it doesn't matter what the "experts" say, it's ONLY as valuable as what people WANT to pay.
Are Stocks too Bubbly, until Major Corrections in our Modern Day Markets, they are always Bubbly. Historically, they never correct when most expectations are that they should. Things won't happen just because FACTUAL data strongly suggests that it should. Clearly, that remains the case in the Current Bull Run. The real Question is what price will be paid for short term Gains. Because believe it or not, it's all about the LONG Haul. Sure, those that make out like Bandits won't care in the least, but they should. Eventually, all heck will break loose, and Fiat Dollars won't save them.
Tell us something commonsense didn't already figure out. The "bull" in the market is predicated on credit formulated derivatives that have to end-date. We owe exponentially into a future that doesn't make anything, service anything and profits off each others' ads.
I suppose the Kool Aid crowd will stone me for saying it, but... you have game tokens, not real cash... and the obvious scenario for these grossly overloaded bandwagons is-- what you got, turns to rot and becomes the fodder for liability. You can very easily invert these "bull runs" and stick investors with repayment of a derivative formulation that- in the words of the formula's creator- doesn't add up. It's online, not in your hands. Flick a switch and you are obligated, not wealthy.
Really... isn't the whole endless Bull Run... one giant Red Flag? Of course it is.
FACT of the matter is this, have most Corporations already taken advantage of the Low Interest Rates and if rates rise, it really won't matter for those with Solid Balance Sheets. Fact is, most that could, have. The CRAP companies will fail because they were already heading there. MG assumption that if the FEDS stop, therefore a Depression is built on too many false assumptions. FACT is many folks that actually RUN a REAL Major Business want the FEDS to stop printing. They will take advantage if it continue but seeing how most are just using the Cheap Credit to engage in Massive Stock Buybacks, what's the real NEED? If they were investing in their Actual Business and training for Workers, MB might have a point. But he doesn't.
There is no WAR on Business. There is however a Massive misinformation Campaign led by folks like MG. Record Wealth for the SuperRich. Record Earnings and Profits for Corporations. Yet MG wants everyone to THINK there is a War on Business. MG is just plain clueless and he will always be that way.
QUOTE: ""One of the biggest red flags out there is that there don't seem to be any red flags out there,"
What a very clever statement... Either that or this writer has too much time on his hands.
If you only lust after the stocks and DON'T buy them, you won't lose ANY money
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[BRIEFING.COM] S&P futures vs fair value: +2.80. Nasdaq futures vs fair value: +7.50. A bit of seesaw action in S&P futures trading over the past hour or so, yet the current move is to the upside and is contributing to expectations for a higher start for the cash market. At the moment, the S&P futures are trading approximately 0.1% above fair value.
Most of the early selling pressure is being seen in the Treasury market and in the commodity complex. The former ... More
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