Monday, 18 December 2006

It's late in the game

Last week was a good one for stock markets, as were the past few years. Maybe it is time for investors to pay the bill. Here are a couple of Bills to worry about.

Bill Cara thinks that the party is almost over.

Little by little the signs are noticeable that this party is almost over and the guests are inching their way to the exit. All that’s left is to crown The Greatest Fool.

Money Flow indicators are showing technical divergence with rising prices in most (but not all) equity markets. Money flows out of markets when there is higher volume on down ticks and down days...

I expect the equity price correction simply because there was no reason, other than excess money chasing fewer stocks (via buy-backs), for the market value of stocks to grow so excessively since mid-July. By fundamental measures, the enterprise value of corporations has grown moderately during this period. So the price increases have not been supported by value increases, leading to an over-bought condition...

I believe that once the selling starts in the U.S. equity market, the result will look like a combination of 2001-2 and October 1987. It’s coming.

More dramatically, Bill Bonner at The Daily Reckoning issues a crash alert.

Everywhere we go…everywhere we look…we see towers of money, property, derivatives, debt and credit. Towers in the stock market. Towers in the housing market. Towers stacked upon towers.

So today, we take the unprecedented step of issuing a “Crash Alert.” Not that we have any special information or insight on the subject. We are just looking out the window.

And what does he see?

Right now stocks and property are at record levels all over the world. An investor has to take stock of himself. Should he buy more…or sell? The pundits, commentators, the Cramers and Kudlows, are all positive. In the face of such jolly sentiment, it’s hard for an investor to keep his wits about him. If he can’t count on his natural gloominess to pull him through, he’ll have to think.

And of course, no investor wants to do that.

But if he were to think, he might want to think of Yogi Berra’s comment on a restaurant: “Oh, nobody goes there any more; it’s too crowded.” Right now, everyone is crowding into these towering eateries. The food and service - that is, the yield an investor might reasonably expect - have already slumped to near-record lows.

Just wait until someone yells ‘fire!’

Of course, this bull market has surprised many investors by its strength. Even the May sell-off failed to scare off investors for long. Why should this time be different?

Citing W D Gann, The Bonddad Blog suggests that it is because the market has possibly moved into "The Third Zone, or the highest above normal marks", based on the observed "length of the rally and the large increase in volume".

Earlier, citing Dow Theory followers, John Hussman had said that the market is currently "engaged in a speculative blowoff ".

... investment advisory bullishness is running near 60%, which Investors Intelligence notes is about the level where historical bull markets have ended. As for the “smart money,” corporate insiders are aggressively liquidating stock, at a rate of about 7 shares sold for each share purchased, according to recent figures from Vickers. Meanwhile, the new issues market is booming, and low-quality stocks (on the basis of S&P's quality rankings) have for months dominated an otherwise dwindling group of market leaders...

Overall, it's late in the game.


Unknown said...

So, may I ask, where is the "smart money" going? Bonds? Foreign markets? Thanks,

lim said...

That's hard to say since a lot of "smart" people are doing quite different things based on whether they think a sell-off is triggered by higher rates or a weak economy.

That said, I think that the boom in equities has been driven by a global liquidity glut, which means that if valuations correct, it is likely to affect bonds and foreign markets as well.

Anonymous said...

if you can't be 'smart' then avoid being 'dumb'

park some of it in a money market and wait for cheaper prices

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