This rally is not built to last

The market is bordering on overconfidence. A snap-back could be in the offing, and could be vicious.

By InvestorPlace May 23, 2014 5:36PM

Image: Stock market © Digital Vision/SuperStockBy Anthony Mirhaydari

Amid the lowest non-holiday volume since last summer, stocks inched higher to close the Standard & Poor's 500 Index ($INX) above the 1,900 level for the first time ever.

There was no particular catalyst for the move. And it wasn't confirmed by other measures of market health.

Instead, as I discussed in a recent post, there's just a general sense of ease and complacency as market volatility dwindles to record lows.

Closing up on any given Friday is a vote of confidence. Closing up ahead of a long holiday weekend that will feature elections in Europe and the Ukraine -- amid reports of shots being fired between North and South Korea -- might very well border on overconfidence.

Here's why.

Breadth has been lackluster (up-volume accounted for only 68 percent of total NYSE volume today, down from 84 percent last week and nearly 90 percent at the beginning of March). Long-term bond yields keep drifting lower as fixed-income traders send out warning signals. And let's not forget that while the S&P 500 bagged 1,900, it was by the hair on its chin (half a point) and represents a level from which it was turned away two other times since April.

The fundamentals aren't exactly wonderful either. Sure, housing has stabilized thanks to that drop in long-term interest rates. But first-quarter GDP is set to be revised into negative territory, retail sales are disappointing, inflation is drifting higher, and consumers are sucking down their savings and turning once more to short-term credit to pad their budgets.

What about corporate earnings? That's topic is worth a full-length column of its own. But to understand what's happening here, just look at what happened today with Hewlett-Packard (HPQ). Shares jumped more than 6 percent after initially trading lower Thursday afternoon following the announcement of weaker-than-expected top-line results and dour forward guidance. Why? Because it took the bulls a little while to celebrate the announcement of deep job cuts and a large expansion of its share buyback program.

This mechanism -- share buybacks often funded with the issuance of cheap debt -- has been the primary way the Federal Reserve's ongoing cheap money stimulus has inflated what increasingly looks like another stock market bubble.

But it could be ending. According to Capital Economics, since the beginning of 2008, a subindex of the 100 S&P 500 stocks with the highest buyback ratios has nearly doubled; compared to the 30 percent or so rise in the overall S&P 500 over this period.

So far in 2014, the buyback index is lagging behind. Perhaps -- as in the case of companies like IBM (IBM) that are now suffering from ballooning debt-to-equity ratios that put their credit ratings at risk -- investors are realizing there is a limit to how long this game can go on.

And finally, it must be noted that much of the market's rise over the past week has been driven by a collapse in volatility expectations as represented by the CBOE Volatility Index (VIX), which fell today to levels that have only been seen one other time (briefly in early 2013) since the market was topping in 2007.

As a result, the VIX has been stuck under the 15 level for more than a month and is well below its 50- and 200-day moving averages. According to Jason Goepfert at SentimenTrader, over the last 30 years market history suggests, with a high probability, that a 20 percent increase in the VIX is to be expected in the coming months.

There have been 15 other occurrences like the current one, and in every single case the VIX at some point over the next month jumped more than 13 percent. And it jumped more than 20 percent every time with a median gain of 45 percent at its highest point.

Which means that S&P 500 1,900 might not last and that the Russell 2000 small-cap index, which is down more than 7 percent from its high, might be telling the truer story of where things stand.

Or the fact that just 60 percent of the stocks in the S&P 500 are above their 50-day moving average -- down from 70 percent last week or 85 percent at the beginning of April in a downright hilarious narrowing of buying interest.

The catalyst could come as soon as this weekend, with anti-euro parties ahead in the polls in Greece and Russia watching wearily as Kiev tries to restore control over its eastern regions.

More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

May 23, 2014 5:57PM

"This rally was not built to last"........terrific, a stroke of genius, name one rally that was built to last, there never has been one, it goes up, then it goes down, then up, then down, then.....well, you get the idea.









May 23, 2014 6:17PM
It's obvious that the government has done everything possible to bail out all TBTF corporations and still are. It's nothing but corporate welfare at its worst. It is really sickening to watch. The dead wood should have been allowed to burn, so the new seedlings could grow. Now the Deadwood corporations with their bad management (constant million dollar bonuses) and their explicit government guarantee dominate the business world like so many tapeworms squirming and feeding in the gut of the sick system. Eventually they will take down the host.
May 23, 2014 5:54PM
We have been telling posters you cannot Short a Manipulated Global Markets pumped up on Crack-Dollars. Yet every time the Markets show weakness, that's exactly what some fools do. It shouldn't come as much of a Surprise this week that the Markets ended Higher. Whenever the short Term Bears stick their heads out the CAVE, the Markets usually do just the Opposite. Dennis Gartman has literally been Wrong every time he plays Switch just as Cramer has literally done the same.

However, this doesn't change the much Longer Term Trajectory of the Global Markets. You can't have Global Debt rise 40% since the Great Recession and not Pay a Major Price in the End. Enjoy the Ride, Lock in Profits when you can because when this Mother of all Bull Markets ends, the Global Feds will be helpless. They have already done just about all they could to manipulate Rates and Markets since the Great Recession. There will be no Magic Rabbits left to pull the Global Economies during Next Downturn. A Global recession that's like to be far Deeper and longer than Previous. Bulls make money. Bears make money. Pigs always get Slaughtered.

May 23, 2014 5:53PM
There are no experts, only those who think they are!
May 24, 2014 9:05AM

Anthony you have been saying this for years - sooner or later you will be right.

I'll make a prediction of my own - Immediately following your horrific Bear Market will come another Bull Market ! You can take that one to the Bank my friend !

May 23, 2014 6:10PM
If the numbers are bad just blame it on the weather.We just had some bad thunderstorms with hail which should shave some points off the GDP.
May 23, 2014 6:03PM
"This mechanism -- share buybacks often funded with the issuance of cheap debt -- has been the primary way the Federal Reserve's ongoing cheap money stimulus has inflated what increasingly looks like another stock market bubble."

Interest Rate have Fallen as Global Debt has Risen. That Oxymoron can't continue over the Long Haul and there is literally nothing the Global Feds can do to prevent that Reality.
May 23, 2014 7:51PM
The country and the cities are broke. Obama keeps making promises he can't keep. The dollar is on the verge of de-valuating again, which could be a disaster since the world currency could change away from the dollar. When other countries stop taking the dollar to pay our loans and buy foreign products, the economy and stock market will take a dive like never before. Wait and see. Obama has run up our debt more than all the other Presidents put together. He will go down as the worst Pres in history. I was just in Italy and the cab drivers and vendors didn't want American dollars!! This is the beginning.
May 24, 2014 10:43AM

No crap the market is overvalued.  When the market tanked from the housing mess it was closer to the real values of companies.  Since then the market is skyrocketed like we are enjoying tremendous prosperity which we aren't.  Unemployment is still high and every other week the numbers go up and down.  Housing is doing the same thing.  1 month sales and starts are up the next they are in the gutter.  Profits aren't at all time highs but the stocks are near it for a lot of companies.  It makes no sense.  These numbers are unsustainable. 

May 23, 2014 9:14PM

BLA BLA  BLA  your comments are like the wind.  No directio of sense just all over the place.  How do you get paid.....


May 24, 2014 5:04AM
The ECB expects the unemployment average this year and next to still hover around 12%. Both China and Japan are in a down-slide with the full effects of Japan's tax hike from 5% to 8%, not yet fully reflected. The United States last GDP print was a Glacial, 0.1 percent. Consumer debt in the U.S. rose in the previous quarter, the most in more than six years.

 Americans have taken on more debt for the third consecutive quarter. Total indebtedness peak, $12.68 trillion in the third quarter of 2008. However, we are seeing Record Student Loan Debt,  balances increased $31 billion to $1.1 trillion, the fastest-growing debt category.

HP is just the latest Company to announce more massive Job Cuts, 10,000 to 16,000. Some of America's biggest Companies reported less then Stellar earnings Reports. Some Folks are getting juiced about increased Ad sales among a growing number of Companies that make basically nothing. Their growth, dependent largely on a handful of Real companies to match future Ad sales expectations.

Global Debt is up 40% since the Great Recession. The Fed's balance sheet is fast approaching $5Trillion. National Debt fast approaching $18Trillion. Yet apparently the World Markets haven't gotten the Real Message as Interests RATES have Fallen since the first of the Year while the DOW and NAS are higher then last Year's close. The S&P just broke and Close above 1900 for the First Time. So for now, Gravity and FACTS have been ignored. The question is not if Reality sets in but when. You can't print/borrow to Infinity, yet some folks will continue to foolish think that we and other countries can. That's just not how reality works in the long haul

May 24, 2014 6:33AM

Obamaville is full of neighborhoods where the houses are built of cards and the winds are unsettled.....

May 23, 2014 6:17PM
I try to be independent of the 'noise' but they keep sucking me back in....

First off,  Mr Mirhaydari says " let's not forget that while the S&P 500 bagged 1,900, it was by the hair on its chin (half a point) and represents a level from which it was turned away two other times since April."    -What this illustrates is merely the 'mirror' of the real economy and its unimpressive performance over the last few quarters.  Again, my Forward Guidance Genie (played by Kaley Cuoco) advises me to ignore the short term for the greater gains possible by focusing on the long.
The overall direction of the economic progress is what's more important.

Secondly, " Because it took the bulls a little while to celebrate the announcement of deep job cuts and a large expansion of its share buyback program."  -  Sure, nobody admires layoffs and other short cuts to solidify the books but the bottom line assures any investor that any device used to amplify stock values will be unforgotten.  The bounty, unfortunately, comes in the form of higher valuations, but at what cost?  The calculus that separates human being from cold-blooded investor is a difficult one indeed.

Third, " share buybacks often funded with the issuance of cheap debt" - Again, those buybacks represent gain for the holder.  I may not agree from the humanistic standpoint, but the cheap money syndrome has other advantages as well, not the least of which is underwriting companies' shortfalls by allowing them to 'go long' on debt that -when utilized intelligently- would reward shareholders into the future....Provided its not being wasted on CEO bonuses, that is.

And lastly, "The catalyst could come as soon as this weekend, with anti-euro parties ahead in the polls in Greece and Russia watching wearily as Kiev tries to restore control over its eastern regions." -  Which means that when the few managers who control the lions share of the money decide to short the market in general, the above will be their 'excuse', which it has not been thus far. 

As the old song goes, "you tryin' to make it real.....compared to What?"

Safe Memorial Weekend all!
May 24, 2014 2:24PM
Some day he will be right. Tell me the exact day so I do not miss the top.
May 26, 2014 11:45AM
Let us  remember those that served on this Memorial day



May 23, 2014 6:49PM
Just what we all need, another article of gloom and doom. If you don't have any good news why not just make up some just like this article, but this time have a happy ending. 
May 26, 2014 11:05AM

Well I know a little about the Bible and a fair amount about organized religion....

But with Markets, they go up and down, can "uptrend for a long period"; And/or "downtrend for short periods."

Within those parameters, even some monkeys can make money, by throwing darts....

You "can't buy your way into Heaven", but take some of your Market gains, donate them to a Food Bank or a church's food bank.....You will feel better for it.

Have a nice Memorial Day.

May 23, 2014 8:32PM
There is one world for the market behavior " rigged" yes , The market  has been controlled  for 5 years , by the government , and the rich and power full one %. " But is not going to last".  Their powers are weakening by the minutes and when theirs knees give away everything will collapse.
May 23, 2014 6:05PM
I agree Tony.  A little wager on the VIX seems like a reasonable short term play.  And the VIX could easily jump into the low 20's on developments of the major areas you described earlier.  Things are always getting sideways somewhere at some time in the world and things just seem a little too relaxed.  Hope for the best but be prepared for far less.
May 23, 2014 7:34PM

It is nice to have an up day before the Memorial Day weekend. This market is unpredictable

sometimes it seems wise to take profits and wait. Housing has been a big catalyst for the upside but so few people actually working has got to be factored in.

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