The S&P500 hovered near its record high levels, closing the week virtually unchanged. What stands out, however, is the total lack of volume. Investors are simply refusing to rush in and buy stocks at all-time highs when dozens of economic metrics fall to multi-decade lows; real wages are not only not growing, they’re sinking. And the percent of people working in the US population has fallen to lows last seen in the 1980’s. And there’s more.
Meanwhile, corporate profits and stock prices are at record highs.
How can this be? Simple—the US government’s has been racking up record deficits for almost five years now. and consumers have nearly stopped saving any money to support their consumption habits.
But both of these forces clearly cannot be sustained. And while the US government has begun to pull back on its spending (remember the sequester), the US consumer has not to save again.
So as government deficits continue to shrink and consumers begin to save again—both of which MUST happen eventually—then corporate profits MUST begin to shrink back down to more normal levels.
Then assuming that P/E multiples don’t explode higher, stock prices MUST edge back down. In fact, given how severely they’re stretched right now, stock prices will likely do more than edge back down; they’re more than likely plunge back down.
The most recent US economic data is still very weak. The Chicago Fed National Activity index, one of the broadest leading indicators of US economic activity, badly missed expectations, by contracting when it was supposed to be growing slightly. Existing home sales also badly missed. New home sales beat estimates, but only because of a big plunge in new home prices (in other words, new homes went on clearance sale). The Richmond Fed missed. Durable goods orders, excluding transportation (this is done because transportation orders are famously volatile on a month to month basis), also missed badly. Initial jobless claims were worse than expected. Yet consumer sentiment beat expectations, perhaps because of the rising stock market.
Technically, the S&P500 is extremely overbought, hovering above its upper Bollinger band on the weekly resolution. On the daily charts, the S&P is also very overbought but it’s appearing to be losing some of its upward momentum. We’ll know in a week or two, if this is only a pause in its volume-less march to new highs or the start of a more severe pullback.
But in the meantime, the lack of volume is critically important. Should even a modest percentage of stock holders decide to sell, the lack of volume implies that there will be precious few buyers to whom those would-be sellers could unload their shares. This means that the only way to entice actual new buyers into buying US stocks will be through a fire sale in price. If prices were to fall by say 10% or 20% or 30%, then many savvy buyers would emerge and make investments for the long-term.
Unlike today’s buyers of stocks however, such investors would be increasing the odds of earning favorable returns.