4/19/2011 2:43 PM ET|
How to forecast a stock-market top
A Wall Street research firm is tracking four key indicators for signs that the bull market is on its last legs. Here's what to look for.
How will we know when the bull market is coming to an end?
This is a timely question, given the extraordinary crosscurrents buffeting the market. Some advisers contend that the bull is alive and well, while others assert that the bull is living on borrowed time.
For insight, I turned to Ned Davis Research, the quantitative research firm, which monitors a basket of indicators to help determine when a market top is imminent.
Nearly two years ago I turned to the company for help in answering this very question. At the time, many were convinced the rally was but a bear-market correction. But Ned Davis, upon analyzing various indicators of a potential top, concluded that the bull market had further to go.
What does Davis' firm say now?
Ed Clissold, the global equity strategist at the company, said there are worrisome signs on the horizon, but the company is giving the bull the benefit of the doubt.
In assessing when the bull might end, Clissold said, the company has identified four major categories:
Though stock valuations aren't at such an extreme as to cause this category of indicators to flash a sell signal, there are causes for concern, Clissold said.
One of these, according to a letter Ned Davis sent last week to institutional clients, is that "profit margins on the S&P are at record highs. . . . Using data back to 1954, very high profit margins, on average, have not been bullish for stocks, because the series is very mean-reverting."
Davis also was concerned with the cyclically adjusted P/E ratio made famous by Yale professor Robert Shiller.
At the same time, however, Clissold referred to other valuation measures that suggest stocks are not particularly expensive, such as the P/E ratio based on 12-month earnings (as opposed to the 10-year average Shiller prefers).
All in all, a split decision on valuation. As Davis wrote earlier this week: "I can certainly understand the bullish stance of those who argue stocks are still reasonably priced, based upon current earnings. Yet, I don't think that presents a complete picture of potential risks. I am just providing the evidence for clients to make their own decisions."
This is the one category of the four that, in Davis' opinion, comes closest to yelling "sell."
Davis maintains two sentiment indices, one of which is well into the zone of excessive optimism; the other borders on that zone.
On contrarian grounds, that is worrisome.
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For all of you who are trying to time the market...
Rodney Dangerfield in Caddy Shack said it best.
"What's everyone else doing? They are buying? Then SELL, SELL, SELL!!" "
"They are Selling??? Then BUY, BUY, BUY!!"
the price of oil will tank the market at some point i believe we have crossed that point except for denial of the facts. it does however tak a few months for the downward spirial to occur. numbers comming out now do not reflect this downward sprial caused by hyper oil increases.
how can people not know this simple fact: " IF I PUT MORE IN MY TANK I TAKE IT OUT OF THE REST OF THE ECONOMY AFTER ALL I CANT PRINT MONEY
You can throw out all the models, the stock market has never experience this high of world debt
Post WWII? You know, when the US was at 120% Debt to GDP?
The markets care about one thing: Coorporate profits. Period. National debt has very limited effects on how much money coorpoartions take in. [From a market perspective, the only thing debt is an indicator of is a potential future decline in consumer spending.]
Point being, if companies continue to get tax breaks and post record profits, then their stock prices will continue to rise. Hence why the current bull was predictable [and why I openly told people who avoided the market they were shortsighted fools.]
There will be a minimal decline when QE2 ends [due to speculators getting a bit worried], but as the coorporate profit picture hasn't changed, I see no sustained decline in stocks for a while yet.
Have a look at the chart from the great depression and compare to now, that will give you an idea of where we are headed.
Someone, is this the chart you were talking about. The crossing of the lines is of great significance as it signals that a catastrophic event has occurred.
"The 1930s offer a cautionary tale: The only other time government income support exceeded taxes paid was from 1931 to 1936. That trend reversed in 1936, after a recovery was underway, and the economy fell back into a second leg of recession during 1937 and 1938."
A recovery than a second leg of recession? Interesting prognostication.
Two lesser recessions within a greater depression.
rest of article
Melvin Carter, you hit the nail squarely on the head.
There are four ways to know when this bubble is going to pop. One, be one of the institutional speculators in the cabal who knows exactly when they are going to pull the plug and at what price. Second, have reliable insider information from one of the institutional speculators in said cabal. Third, believe on faith in a talking head on the corporate media whose job it is to get your money for the institutional speculators. Forth, throw a dart at a dart board.
The first option is cost prohibited. The second is illegal. The third is foolish. The forth is as good as any of the other option a corrupt casino is going to give you.
You’re absolutely right volume goes down when the suckers are not going to show up for a sucker rally. Bring some credibility to where there currently is none.
Have the SEC set the leverage ratios at 1:5 and make this credibility problem go away.
My prediction is if they don't get a handle on gas prices before the end of May, you can start worrying about your investments....Just guessing....
You are dead on. I remember that just before the last big 'correction', CNN had people on TV every day singing the praises about the 'market'. One guy in particular stands out in my memory because he went on tv and predicted the Dow would be at 20,000 within a year. In a few months it was around 7000.......just about the same amount down as he predicted up. If anyone (and I'm sure there were some) listened to his advice I wonder if they were surprised when they looked at their returns a year later.
The more I see of it, the more I'm becoming convinced it is a confidence scheme.
My wife is one of the 'park your money in your 401 and forget about it' types. She just had her 10 year anniversary of being in that account with Vanguard and her personal rate of return for 10 years is less than 1%.
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