Bubbles, Bubbles Everywhere

Another jump in stock prices in the face of severely deteriorating market and economic fundamentals? Why not. This time the S&P500 rose 2% on the usual feeble volume. So no, most everyday investors are not rushing in to buy near all-time highs, but the same investors, whether retail, institutional, or computer driven funds are running up prices. The conventional wisdom is that they know, just know, that prices are too high. But you ‘can’t fight the Fed’ and as long as QE continues, you’ve got to keep buying stocks. And besides, they’ve convinced that at the very first sign of trouble, this elite group of investors—-millions of them—-will be the first out the door, before everyone else, and escape any real damage.

Of course.

The US economy, meanwhile, continues to struggle. Business inventories failed to grow as expected. The Empire State manufacturing survey fell into negative territory; it was supposed to increase. Industrial production dropped much more than predicted. Initial jobless claims spiked to 360,000. Housing starts collapsed. And the Philly Fed survey was a disaster, falling deeply into negative figures instead of rising as expected. Only consumer sentiment and leading economic indicators beat expectations, but the main driver of the beats was the artificially engineered stock market rise.

At the same time corporate sales are failing to grow, on average, across the S&P and earnings are barely growing at all. This poor corporate performance is not what normally drives stocks to record high prices.

Technically, the US stock markets are very overstretched. On monthly and weekly charts, stock prices are bumping up against extremely high technical ceilings, and in some cases, cracking through them. Bearish sentiment has all but disappeared,  falling below 20% among investment advisors and bullish sentiment is well above 50%. This, according to long time investor John Hussman, means that the US stock markets are extremely overly bullish.

Other, bigger and more well known, investment experts are being more blunt. Bill Gross, who founded and co-runs PIMCO, one of the largest asset management firms in the world simply stated:

“We see bubbles everywhere”

And this is primarily due to the Fed’s QE programs, according to Mr. Gross.

Could prices rise some more, despite the extremely stretched conditions today? Sure.

But no bull runs last forever and history has proven that the greater the deviation above historical norms, the greater the ‘snap back’ that will always follow.

Aside from the highs in late 1999 and early 2000, US equity markets are more over-stretched than ever before.

Be careful.

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