Do You Believe in Miracles?

After reaching what we described as “nosebleed valuations” the prior week, the S&P500 went on to climb another 0.6% last week. Volume however dropped quite a bit from the prior week, so while new all-time highs were set, the conviction level of investors and traders did not increase. Also, the S&P’s volatility set a new low for the year mid-week, but it began to creep back up by week’s end, so once again, this measure suggests that while investors love the new stock market highs, they’re a bit nervous and keeping an eye on the exit doors.

US macro news was mixed last week. Although the housing market index missed expectations, housing starts beat consensus estimates….but just barely. Initial jobless claims are still clinging to multi-year lows. And PMI flash manufacturing also beat expectations. On the negative side, the Philly Fed business outlook survey missed badly and the FHFA house price index also missed expectations. So once again, there is no real improvement to report for the US economy.

As extremely overbought as the S&P was last week, it’s now even more overbought…..on both the daily and the weekly charts. So from a purely technical perspective, if an investor plows new money into the S&P500 today, he or she would be betting that the extremely overbought conditions would grow to become even more extremely overbought. Good luck with that strategy to anyone who follows it….and unfortunately, there seem to be a lot of investors who are following it.

From a valuation standpoint, money manager and PhD economist John Hussman, in his most recent bulletin, pointed out that there has been only one time in US history when the S&P500 has been more overvalued…back in 2000 just before the tech bubble burst and took down all the US stock markets and pushed them into bear market territory. So for an investor to do the same today—give currently “obscene” valuations, then that investor would essentially have to believe in miracles……that something that’s never happened before would happen this time—that stock prices would materially and sustainably advance from today’s nosebleed levels.  As Mr. Hussman notes, this does not mean that prices can’t go even higher in the short-run, but any such increases would be given back, and then some, in the brutal price retreat that will almost inevitably ensue.

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