Market Commentary:
As I have said before and I repeat it again, I am looking at the risk side of the equation. I have no intention to only focus on the negatives but it only takes a small dose of overconfidence to wipe you out if this turns out to be another sucker’s rally.
As we come into the second week of May, seasonality factors are now shifting negative. It is absolutely true that a number of trend following tools have turned positive over the last few weeks but you must understand we saw the same thing happen in the bear market rallies of 2001 and 2002, which ultimately turned out to be sucker rallies, followed by lower lows.
We know that bear markets are notorious for sucker rallies. The greater the bear market, the greater the rebound … and the greater the trap.
Look at the stock market like a jumper with bungee cords tied to a person’s ankles whose initial fall is followed by recoil. The greater the fall, the greater the rebound but after this initial recoil occurs, the jumper experiences another free fall. Given the volatility of these wild swings, we don’t want to minimize the risk of what another down wave could mean to you.
There just isn’t enough evidence that says this roller coaster is now going to go off the rails and defy gravity for much longer.
Here are ten reasons from both a technical and fundamental perspective, why I am not ready to embrace the bulls.
1) The majority of the major market indexes are not trending above their 200-day moving averages. Bear market rallies are notorious for rallying to their 200-day moving averages and then topping out.
2) None of the indexes are above their monthly middle Bollinger Band lines. Bear markets trend below the monthly middle Bollinger Band line and bull markets ride above it. This market is still trending in the lower part of the Bollinger Band channel for all the indexes, including the Nasdaq 100!
3) The 50-day moving average is discounted and trading below the 200-day moving average. In sustainable bull markets, the 50-day moving average will trend above the 200-day moving average. In bear markets, the 50-day moving average will trend below the 200-day moving average for the S&P 500 index.
4) The S&P 500 is still trending below its 10-month simple moving average on a closing basis. In a study by the Journal of Wealth Management this tool would have kept you out of all the bear markets since 1900 including the Great Depression and you would have caught all the bull markets. We are still below this threshold.
5) We still have a left translation verses a right translation. A left translation has a pattern of lower lows and lower highs from on intermediate term cycle low to the next. The majority of the indexes have not taken out their January highs and we still don’t know where the next intermediate-term down leg will settle.
6) Cycles point to a peak in May, with a down leg to about July 17th or so. This traditional cycle peaks this week. My proprietary indicator, the Fidelity Select Family Stochastic Oscillator, is at %K 96 and %D 95. Weekly stochastics are cresting. Daily stochastics are now negative.
7) The slope of growth in the money supply is dropping like a rock. M2 has been falling steadily and last week fell from 2.4 to .7 – that less than 1% folks. Volume on this rally has been subpar. In a bull market volume rises on rallies and declines on bad days, but what we are seeing is volume rises on bad days and falls on advancing days.
8) The P/E ratios for the S&P 500 companies are off the charts! The P/E ratio for the Nasdaq 100 is 65.51 times earnings. Check out the links:
http://www.bullandbearwise.com/SPEarningsChart.asp
http://www.bullandbearwise.com/NASDAQ100RealPE.asp
9) Sentiment readings are way too bullish now with the NYSE Bullish Percent Index showing 75% bulls.
10) Corporate insiders are aggressively selling into this rally, not buying on the dips.
We have seen the worst three-quarter economic performance in the last 70 years. I think there is a danger in getting overly optimistic. The higher the market gets ahead of itself, the greater the risk of a big adjustment.
Remain cautious as the probabilities of a retest are very high.
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