Of course this market can go down

Too much bullishness is widely in evidence as investors and traders have been totally conditioned to 'buy the dip' and believe that the Fed has their backs.

By TheStreet Staff May 7, 2013 1:23PM

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Arrow Down copyright ImageSource, PictureQuestBy John Nyaradi

 

As major U.S. stock indices reach new highs with no meaningful correction since last October, investors seem to believe that this market can never go down.


Last week, the Dow Jones Industrial Average ($INDU) briefly broke 15,000 for the first time, while the S&P 500 ($INX) closed above 1,600 to set a new record.

The drive higher was fueled after the European Central Bank cut interest rates and by a better-than-expected nonfarm payrolls report on Friday. 


For the week, the Dow climbed 1.8%, the S&P 500 gained 2% and the Nasdaq ($COMPX) gained 3%. The last time the S&P crossed 1,500, the previous century landmark, was in March 2000, just before the dot-com crash that started soon after. So let's take a look at the scorecard of the bull vs. bear case from here. Can this market ever go down again? 


Bull Case

1. Intense global central bank support from the Federal Reserve, European Central Bank and Bank of Japan as they continue quantitative-easing measures in an ongoing attempt to kick-start the global economy.

2. Earnings reports, while not spectacular, were enough to hold up the major indices during this earnings season that's just ending.

chart 

 

3. Investor sentiment, which seems bullish (maybe too bullish) and the "buy the dip" mentality still rule major stock indices.


Bear Case

1. A definite and significant global slowdown is under way. Recent economic reports from every corner of the world, including Japan, China, Europe and the U.S. confirm the deceleration under way, and this can only add downward pressure on corporate profits over the coming months.

2. A stagnant U.S. economy. While the nonfarm payrolls report was celebrated on Friday, 165,000 new jobs is pathetic in the historical scheme of things, and underlying indicators such as hours worked, underemployment and low-paying jobs making up the bulk of the gains dampened the overall significance of an "improving" labor market.

3. Seasonality: "Sell in May and go away" is a widely known phenomenon, and its accuracy has been well proven over time. 

4. Markets are overbought on a technical basis. Generally, the major indices are at levels from which significant declines occur. A peek at the percentage of S&P 100 stocks above their 200-day moving averages tells the story as we see that current levels of bullishness tend to mark market tops and are usually followed by meaningful declines. 

5. Too much bullishness widely in evidence as investors and traders have been totally conditioned to "buy the dip" and believe that the Fed has their backs. The VIX (the CBOE S&P 500 Volatility Index), also known as the "fear index," languishes near historic lows while margin debt is near record highs, similar to those readings of July 2007, set just three months before the beginning of the financial crisis and related bear market.


So can this market ever go down? Yes. Will it ever go down? Yes, and that could happen soon. Wall Street Sector Selector remains in red flag status, expecting lower prices ahead.

 

 

More from TheStreet.com

 

 

69Comments
May 7, 2013 3:54PM
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When the Fed stops pumping huge amounts of money into the market, it will drop like a rock.
May 7, 2013 1:37PM
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The chart of this market is an inverse image of the market in 2002 near the end of the bear market in stocks when it was a relentless grind down for most of the year. It is my belief that this is the last leg of the bull market.
May 7, 2013 3:18PM
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This market cannot go down while the FED is pumping it up with 85B a month...
May 7, 2013 3:56PM
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This market is a joke and so are all those that promote it!  
May 7, 2013 4:02PM
May 7, 2013 5:45PM
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National Debt 17,000,000,000,000      

Dow                                     15,000 

                                                                                                            

May 7, 2013 4:11PM
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Sell judiciously.  The first time the Fed raises rates a mere fraction of a point, it's going to come crashing down around your ears.
May 7, 2013 4:03PM
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We needed an "article" to highlight this? Wouldn't a "deployment" have worked better? America's genuinely screwed by Bernanke, dead Congress and a scholar President. Day after day is this BS and ZERO activity at the fundamental levels where REAL business exists. Hey-- housing prices are UP (market run), they retract slightly when the severe corruption hoisting the home values is found out. Oh LOOK... deadbeat business platforms beat Wall Street's estimates (of being alive by reporting time at all)... markets go UP, they retract slightly when the overpaid bookies missed several decimals after those cocaine snorts. The whole job creation job numbers thing is straight out of Hitler's playbook. No jobs means NO JOBS. If every new adult to 30-something and every over 50-something is blockaded from stable jobs... then we REALLY have a problem with 40-years olds RIGHT? WRONG... Ben says all it needs is more TRILLIONS and it will trickle down. No it doesn't Ben and there isn't any place on Earth you will run to and not be dragged back here, tried and found guilty of the worst crimes the world has ever known... living death by financial tyranny.
May 7, 2013 4:26PM
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This all BS with the "markets".  Devaluation of the dollar continues. There are no "investors" as in laypersons working other than K's and pensions and most do not understand how that works.  It is thievery at it worst and this will continue.  BS....total!
May 7, 2013 4:27PM
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What?  No vicious attacks on this conservative market analyst?  I am used to opening the business news and finding vitriolic attacks on Anthony Mirahandi (sp.?).    These comments are refreshing, 
May 7, 2013 5:00PM
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Of course the market is being too bullish. The domestic and world economic fundamentals don't underpin it. But such is the nature of bubbles right? If you've been invested in the market during the run up, I say good for you! To those wise enough to be cashing out some profits while you continue to play, I say great for you. And for those of you holding on to long and who get stuck holding a bag.. I say oh well, better luck next time!
May 7, 2013 1:46PM
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That's what Markets do.....Go up and down, many stocks/equities are cyclical(sp).

 

Of course recessions and other calamities, can throw "a wrench in the works."

May 7, 2013 4:45PM
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Love all the pessimism in postings these days, could be a good sign.
May 7, 2013 5:20PM
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Danger Will Robinson, Danger!!! (everbody do the robot wave)
May 7, 2013 4:59PM
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Maybe this is too simplistic, but why shouldn't companies today be worth more than they were worth 10+ years ago?  Even if they were only to keep pace with inflation, there would still be a lot of room for growth before the market is above it's historically upward trajectory, or Am I missing something?  It's never straight up, so there may be corrections downward,  ut over the longer term I see no reason for such pessimism.  At the very outset of the Great Recession, it was predicted that the recovery would be long and slow (which is what occurred), so I don't know if this is a reason for concern.
May 7, 2013 5:27PM
May 7, 2013 5:23PM
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If I were a boomer I'd get out soon, but I am not, I have no plans to do that.  I don't invest with my emotions.

May 7, 2013 10:26PM
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With all of the criticism on this post, most of which is depressingly ignorant, what would you have us do?  What's your detailed prescription for the average investor?  What's your detailed prescription for Congress?  All I see is criticism fueled by the know-nothing talk show hosts.  For investors you criticise all investments (except gold which historically and recently been horrible) and you criticise both fiscal and monetary attempts to bolster the economy.  You gleefully rant about the inevitable inflation and market crash, BUT YOU OFFER NO ALTERNATIVES.  Stop telling the government (and the rest of us) what we shouldn't be doing and come up with some real solutions supported by real financial and economic data, theory and history.
May 7, 2013 7:32PM
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Probably couldn't have said it better.....ExCeo..
May 8, 2013 5:27PM
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Markets will go up forever, just jump in the band wagon. Fed got our back
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