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Evidence and Pricing Pilling UP

Evidence and Prices Piling UP


     In this update, I’ll offer even more evidence that this moment in time is THAT time when we will look back at the stock market and identify it as an unbridled buying frenzy. Usually, these moments mark at least intermediate term tops. I’ll finish with an honest discussion regarding the promise of the American Dream to give you something to think about over the weekend. On with the show...

More Evidence – No Bueno


     The theme for the last couple updates has been identifying signs of excess among investors who are chasing a nearly parabolic rise in the US stock market. We talked about the signs like tracks in the snow leading to the bear’s den. These signs began to emerge on January 27th and after a much stronger than expected February, we had what could be a blow off moment for stocks on Wednesday, the first of March, when the market gained a mere 1.5% +. Who could sit on the sidelines with great gobs of cash when making money is perceptively so easy? Well, the numbers are now in and the answer is… not many. Wednesday, the 1st of March marked the largest one-day inflow into the SPY (proxy for the S&P 500) ETF in history. $8 Billion flowed into that fund alone in one day. In aggregate, inflows into stock funds in the first 60 days of the year came in at $124B putting us in the top 10 of all periods of strong inflows in the first 60 days since such things have been measured. I wish I could tell you that strong inflows at all time new highs is a good thing but it’s not. Strong inflows (or record inflows) are the hallmarks of markets that are within striking distance of the next correction or bear market. 

     Regular readers know that we have three main criteria that go into our Net Exposure analysis. They are valuations, sentiment, and technicals. Valuations are a blunt trading instrument but they do tell us where we are in the spectrum of opportunity and risk. Today, valuations are in the top 5th percentile of all markets in terms of being overvalued. No Bueno. Sentiment figures are good to watch but only meaningful at extremes. Sentiment is contrarian and reflects the repeat behavior of investors who buy high and sell low. Today, we are buying high, flying higher and sentiment has reached extreme bullishness. One of our research sources does an average of all the sentiment indicators and puts it on a scale of 100-200. When bullishness reaches +200, the market is said to be unattractive. Today the average sits at +244 and inflows of new money chasing prices higher confirms. My kids wanted me to buy Snapchat stock yesterday on the IPO. I laughed and told them I’ll look at in one year at half the price (just like we did with Facebook, Twitter and Linkedin). Folks, do me a favor and never buy the IPO as the event is just a shark tank for the primary founders to cash out. Snapchat’s IPO will be one of those events that historians point to and say, “can you believe that happened?”. For the record, Snapchat now loses $515M/ year (up from a loss of $373M last year) and yesterday was valued at $24Billion. Silly. So sentiment is… No Bueno. The technical picture is still ok remarkably although deteriorating. This is the last piece of the analysis for us and an important one. Technicals represent actual price trends and measure them against things like breadth, volume, leadership, selectivity, seasonality, and relative strength. On this front, we have a positive situation for now as most variables are still confirming the new highs we have recently seen. The technicals are… Bueno for now.


Likely Pattern for Stocks From Here


     All things considered, including pending news of a Fed Rate hike, issues surround the debt ceiling, Trump, Elections in Europe, a potential reversal in European bonds that will be very destructive to wealth and seasonality, a likely path for stock prices is beginning to emerge.

     It seems likely that prices will put in at least an intermediate-term peak in the next week or two to be followed by a SURPRISE correction of say 5-7%. But, beyond a correction, there is still the very real possibility of another surge higher out to even higher highs through April and possibly into the summer. Seasonality will bring some new selling pressure beyond April but this market has a lot of momentum behind it, so trends could push higher and longer this year. The last surge will be one to watch very closely. If it occurs without a ton of technical support and the market rises on the back of only a few selective stocks or sectors while the rest of the market fails to participate, then we have a set up for the next bear market starting this summer. So again, we’re now looking for a mild correction of 5-7% followed by a tradable rally out to new highs into the spring and summer. Depending on the technical support for that last surge, we may be hunkering down into heavy defense for the first time since 2009.


The American Promise Is Lost


     Americana and patriotism for our great land of the free has always fallen back on a basic tenant or promise. If you study hard, work hard and play by the rules, you will be rewarded with a reasonable middle-class lifestyle. For those who have read Thomas Freidman’s new book, “Thank You For Being Late”, Chapter 8, you know that this promise is no longer valid. Looking backward, if you punched a clock for a five day work week after completing a basic High school education or even a four-year college you could own a home, have a family and get by ok. Since, 2007, those standards have changed as more and more hard working American families find they are still underemployed or not making enough to carry what we would consider a middle-class lifestyle. Trump campaigned on this reality but in my opinion, offers nothing more than a delusional solution so far. But his message was heard and deeply felt by many in our country who know that the American contract has been broken. We know that the promise has been compromised by technology replacing jobs, by a service economy replacing manufacturing, by Amazon eating all brick and mortar retail and by globalization offering a much lower cost wage structure for global companies. These are trends that have been going on for decades, really since the 70’s and are now accelerating with one industry after another (print media, coal, taxis) falling to more efficient, convenient, instant and cost effective solutions. As a population, we have failed to keep pace with the rate of change in the world around us and it hurts to feel left behind. To me, we need to reach down deep beginning with our kindergartners and teach them to be self-starters, innovators, game changers, problem solvers, and creatives. As Freidman said in his book, they will not go out and “find” a job, they will “invent” a job. I hear a great outcry for high-paying jobs but I do not see a highly skilled labor force. Today, wages follow skills and flow to those who bring more to the table. Punching a clock and expecting a higher and higher wage just to keep the seat warm year after year will lead to frustration. 

     I offer this honest appraisal of our situation in the context of two things. The first is in relation to a dynamic set of new policies that are designed to resurrect the American Dream, make good on the promise. You should ask yourself, using your smart critical thinking mind, is this policy really going to bring about the desired results? What policies will drive higher wages in our middle class? I can see more low wage middle class jobs but we’ve got too many of those already, right?

     The second point is really about standards of living and the cost of living. One of the greatest threats to our current predicament is an unwanted rise in the cost of living. Middle America is barely making it as is and already feel angry that they are not living the promised American Dream. I fear that rising inflation and a rising cost of living will create social unrest from here unless it comes with rising wages. So far, that’s not happening. Inflation is on the rise, the cost of living is on the rise but wages in aggregate are not keeping up. The solution is about retraining and continuing lifetime efforts to learn or upgrade our skills. Only then can we resurrect the promise of the American Dream.


Something to think about over the weekend


Sam Jones