But, so what! Please note that one of the markets recent big movers is Caterpillar, who just recent took a billion $ Obamacare write-down. While Caterpillar and some others (Ford) are now actually pushing out a profit, they are still fragile profits. Also, some of the other strong movers represent products like the iPad, which doesn’t relate to a whole lot of Americans drawing a living wage. Great if you work at Apple, or wear a $8.50 an hour Blue shirt at Best Buy, but most of that green is heading to China.
Now, I will tell you that the majority of my indicators are signaling that the stock market has probably entered the last phase of its medium-term uptrend, which began in March 2009. If you saw earlier posting, you would know that I place great stock in price to earnings ratios.
I went over price-to-earnings ratios (based on twelve-month’s earnings) and dividend yields this week. Both metrics are showing a heavily overvalued market.
Also, I want to add that "normalized earnings," which try to even out the impact of the ups and downs in the business cycle, are strongly supporting this message.
Plus, I'd like tell you about one more important signal...
Sentiment Indicators Are Still Euphoric
I reported in Feb. that mutual fund cash level was an excessively low. Now the March figure is in, and it's the same as February's! The only other time we've seen fund managers holding such a low level of cash was in the summer of 2007, a short three months before a major stock market high. Therefore, a high % of liquidity is already in play in equities rather than in cash reserves.
While not terribly scientific, I want to give you my latest readings of what some call “Investors’ Advisory Sentiment”... The percentage of bullish advisors is dangerously high, and it's still rising!
According to Bloomberg, who tracks such trends, the” bullish” contingent stands at 53.3 percent, up from 51.1 percent just a week ago. Whereas “bearish” advisors are down to a very low 17.4 percent. Even more bothersome is the most recent ratio of bullish to bearish financial newsletters, currently at 3.06, as shown in the second panel of the chart below. Last week it was 2.7. What does THAT tell you?
This tells us that the short-to medium-term upside potential is probably very limited. The markets ride on sentiment. When sentiment so one sided its time to listen to the little bird
Speaking scientifically for a moment, my own advisor, (Peter Schiff’s Euro Pacific Capital) and I recently discussed how equity put-call ratios had fallen to levels not seen since 2000, the year of the famous NASDAQ top, when the dot com bubble burst. That should be a headline, but due to the current sentiment, is ignored.
Last week's small market correction did nothing to dampen option speculators' willingness to bet on further rising stock prices and this week’s tally is still two days away, but odds look good that despite the public lynching of Goldman Sacks, the Dow will be unharmed by Tuesday’s short sell off.
What's more important than dollar based Mutual Fund levels...What the Bullish advisors & the Regime in Washington don’t want to talk about???
Liquidity Has Dried Up Globally
There still seems to be a lot of talking about the huge liquidity driving this market higher. And yes, the Fed's answer to the housing and banking crisis was a historical wave of liquidity with M-2 money supply growth rates of more than 10 percent. But take a look at what has happened since.
Year over year M-2 growth has stalled ... growing by a mere 2 percent. That's a far cry from a huge wave of liquidity. It's better described as a trickle.
And if you take a global view, the picture is even getting worse! Greece, now Spain. Who’s next? What does it matter? There isn't any liquidity left to plug the holes.
The so called excess liquidity of the G7 nations has actually declined by 5 percent during the first quarter of the year.
If this global stock market rally was driven by liquidity — and I really think it was — the drying up of global liquidity should be seen as a clear warning sign.
This "bull move", which in my opinion was really a huge bear market rally that started in March 2009, is already on borrowed time. And I expect the market to top out during the coming months. Dow 12,000 is unsustaianable. 11,000 may be as well.
But, who knows. I sometimes fail to accept that markets respond to trends more slowly in the macro sense & react too radically to minor current events than my analysis would indicate.
But, I see no end to the insanity inside the Beltway. These guys Bernanke & Geitner, et al, are arsonists asking for more matches and Congress just says “Who do we make out the check to”?
Omar Bounds
The Bounds Auction Company
