Ten reasons to beware the Bear
Filed under: Investing
I'm wary of both extreme euphoria and gloom because they reflect emotion more than reality. For instance, a mere three weeks ago, the financial media was chock-full of stories warning that the stock market was about to suffer a dramatic decline due to an ominous "head and shoulders" pattern in the S&P 500's chart. Instead of declining, the markets rocketed up for three straight weeks, with the S&P 500 topping out last Friday at 1,010. (For the record, I went long on July 9th and explained my reasoning on my blog, Of Two Minds.com.) So much for widespread gloom being an accurate predictor of stock market action. Rather, such extremes of sentiment are remarkably accurate contrarian indicators.When gloom and fear are absolutely pervasive, conditions are ripe for a reversal-that is, a stock market rally. Gloom also reigned supreme in the first week of March when the stock market reversed its panic-stricken drop that began in late 2008.
Now we find the exact opposite emotion-euphoria-is pervasive. Standard-issue financial pundits (SIFP) are falling over each other in their eagerness to declare a new Bull market, the end of the Great Recession, financial stocks are dirt-cheap, etc. All this confident euphoria is driving the contrarian meter off the scale, creating an ideal setup for an "unexpected" return of the Bear-not just a modest retrace or correction most expect but a sharp, unrelenting decline.
There are a number of technical indicators that suggest the 1,010 level on the S&P 500 is not merely a way-station on a great glorious Bull market, but the top of a five-month uptrend. You've probably read about these indicators already, but it may prove prescient to ponder the entire list:
1. The rally is getting long in tooth. Technicians have long noted that rallies and declines tend to last 60, 90, 120, 150 or 180 days. The end of last week marked day 150 of the rally from March 6, and while it is possible it may run another 30 days, it is already one of the longest rallies on record.
2. The market tends to top in late July or early August, especially in the first year of a presidential cycle. Nothing is written in stone, but this is worth noting.
3. Bullish sentiment is at contrarian/reversal highs. Most measures of sentiment are in nose-bleed territory, and at least one spiked sharply after July 23.
4. Volume has been declining during this rally. The cliché is that "volume is the weapon of the Bull," and this truism has been supported by history. Low-volume rallies are suspect, and this one is not just low but declining in volume.
5. Valuations are extremely high. The price-earnings ratio (PE) of the S&P 500 is somewhere north of 140, quite a bit higher than the average of 14 and Bear Market lows around 7.
6. Insiders are selling like crazy. The ratio of insider buying to selling transactions is 5 to 145, and the buys--$13.4 million--are pathetic compared to the Sells: $1,042 million. Hmm, what do they know that the rest of us don't?
7. The S&P 500 and the Dow just hit key technical resistance. Many traders look to Fibonacci projections for guides to future action and the S&P 500 and Dow just reached the 38.2% retrace of the entire move from their Oct. 2007 highs to their March 09 lows.
8. The dollar and stocks have been on a seesaw. Regardless of "why", the U.S. dollar and the stock market have been on a seesaw all year: when one touches bottom, the other is topping out. The dollar hit bottom last week, so... the picture darkens for equities.
9. Highly speculative companies are soaring. When stocks of visibly risky companies start shooting to the moon, that's often an indicator the rally has reached a bubbly level of speculative excess, which is typically followed by a hard fall.
10. Stocks have been rising on excess liquidity, not investing. The Federal Reserve has been pouring billions of dollars of liquidity into the financial system at near-zero rates of interest, thus tempting money managers to put money to work in the stock market. The U.S. stock market has increased about $2.7 trillion in value, yet only $400 billion has been shifted out of money market funds into stock funds. This "hot money" doesn't sound like a solid foundation for the rally.
Nobody knows the future, but it may pay to be cautious for the next few months-historically, the worst months for stocks, surpassing even October.
Charles Hugh Smith writes the Of Two Minds blog and is the author of numerous books, most recently "Survival+: Structuring Prosperity for Yourself and the Nation."
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Reader Comments (Page 1 of 1)
8-09-2009 @ 4:14PM
DAN said...
The stock market is a living entity ,like the human heart it beats fast or slow depending on how much activity we are involved in.it can't and won't remain dormant for it would fail. therefore investors are allways looking fo negative or positive signs to guide them in their quest for profits.common sense would indicate that a market 70% dependent on consumer spending at a time when consumers have no choice but to cut back on spending has to adjust to the idea of a shrinking economic base and lower profits therefore this market rally is another burst of irrational exuberance that will lead to a bust .THE MARKET HAS NOT CRASHED YET.
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8-09-2009 @ 5:39PM
mark said...
Have to agree with Dan- US mkts have become overly dependent on spending habits of consumers. Becoming dependent on betting how much consumers will or can spend is quite a shaky way to count your chickens, in this recessionary environ. Its what happens when we have no natural resources or manufacturing base to fall back such as the Arabs and their oil, or China has in their workforce. It's whats also creating the current health care reform fiasco- med-industrial complex (aka private insurerers and big pharma) have invested billions of private capital betting on higher premium profits to drive their balance sheets. Well, Guess what. No one can afford the 200% increase in premiums anymore, thx to the billions of dollars flitted away on one and half minute Celebrex and Viagra advertising spots for a product that requires- of all things- an expensive trip to your friendly neighborhood MD for a -prescription. A very bad bet by tunnel visioned pharma and insurance execs. The system will have no choice but to collapse at some point. Completely. It just cannot keep producing nor be expected to profit at the levels previously seen.
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8-09-2009 @ 6:37PM
MarkCamp said...
What goes up must come down. We have been going up for quite a while.
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8-09-2009 @ 10:02PM
m.roth said...
i have been charting indexes for 30 years and have seen the short and intermediate term bull and bear markets come and go....i hope i am wrong , but i see a long term cycle and 1-2-3 top ( +60 years) ( 1 top at 14,000 , 6800 as the 2 point ,and 9900 as the 3 point on the dow and a long,broken crash to 2800.......be careful!
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8-09-2009 @ 11:28PM
jwallstrom said...
You don't want to be on the wrong side of a fibonacci curve. Although I usually prefer it with a pesto/pine nut tapenade.
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8-10-2009 @ 6:49AM
MrDoughnut said...
In the end the jobs must provide the income to repay debts or the markets crash. If stocks do not reflect this their worthless.
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8-10-2009 @ 8:25AM
brooks said...
printing money cannot be the answer
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8-10-2009 @ 9:34AM
jeff said...
ONE BIG REASON NOT TO BELIEVE AOL OR DAILY FINANCE THEY LIE! Yes their headlines often say something like XYZ COMPANY REPORTS EARNINGS DROP EVEN THOUGH THEY MADE A PROFIT OR NEW HOME SALES UP BUT FORGET TO MENTION THE HOMES ARE ONES BUILT 2 YEARS AGO BUT NEVER SOLD!! Truth is the DOW is going up for a while especially from the auto makers gettin huge sales from Cash for Car$ ! Expect them to call back some workers since many have almost sold their entire inventories! Just be wise and keep at least 20% in some type of fixed funds and keep that balance as they market rises by selling as it goes up every 250 points and buying back for every 500 drop! I have already broke even and made a profit from the big drops because I did not get greedy and leave 100% in stocks which is foolish!! Expect the DOW to go up to at least 10,000 before October but do not ride it much over that or you will get burned when people take profits! BY THE WAY THEIR IS NO BULL OR BEAR JUST IDIOTS WHO BELIEVE IN IMAGINARY ICONS!
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8-10-2009 @ 9:42AM
setec5354 said...
lies and corruption remain alive and well and with the headlines..bank profit on overdrafts only say one thing...it will always 1000% rob you blind as before and as always!!!!
it has unfolded real and will continue real!!!!!!!!!!!!
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8-10-2009 @ 12:38PM
MARGARET said...
GOOD ARTICLE.
This is the "reality" I was already assuming. Most of the points made are so clear especially the point he makes about a faux bull...investors are so desperate to get back to the times of 13,000-14,000 as if we should shed or forget the past. We dream a lot in America like that.; like we should not be hurt, like hard times should not touch us, like we should not be forced to tighten our belts and downsize to squeeze through hard and difficult times until the whole machine corrects.
I agree with the article and basically it is saying stick with a reliable amount in cash and sell stocks more on the short than on the long for right now. The long sustains the market far better than the short but the short right now is how everybody feels. We don't know what giant, what old reliable company may fall because we now feel it is not the company that is the problem it is the people who are running it.
THANKS FOR THIS ARTICLE. AND, I'M ONLY GOING TO SAY THIS ONCE. MOST OF THE OTHERS ARE NOT OF THIS QUALITY.
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8-10-2009 @ 1:03PM
anthropologist said...
"BY THE WAY THEIR IS NO BULL OR BEAR JUST IDIOTS WHO BELIEVE IN IMAGINARY ICONS!"
----I can used this sentence. I will use this sentence. This sentence is huge when it comes to understanding something about human consciousness. With just a few words changed in this sentence I'm expecting that some other people will clearly agree because the enlightenment is phenomenal.
"By the way..." you said, and I switch to: "There is no GOD or JESUS just some idiots who believe in imaginary icons!"
I'm telling you that's huge. Millions and millions of investor-minded people can tell you what a "bull market" is and they can describe a "bear market" too; they may have trouble distinquishing a "snail market" but they know what they want and they know when they get it. Now it may be hard for them to detect the exact moment it ignited and the wave took off but they know when they're in a full ride. It's the same way with religion...and this man admits he has been 'saved' by the upsweep in March, 2009 and so on. He made some wise decisions apparently and likely made them on the "sense" of a giant worldwide market that he really can't see. He can only know it is there by sheer numbers on a screen and faith in the people who are operating it. That faith paid off. He has been saved. He has been blessed while a lot of us are still trying to get there. Yet, he says the upsweep, the wave, the bull and the bear (the recline) does not exist, that they are just "icons"....but then so are those lights and numbers on the boards but you made a bet on them, based on pure faith, and you won.
(Can I copyright this right now?) Brilliant!!!
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8-10-2009 @ 1:34PM
Irishtrader said...
Probably one of the more astute and technically correct articles researched and printed recently. Amazingly spot on. Esp. on the issue of insiders sell-offs vs. buys. They're all betting against a long term recovery by doing this. A huge imbalance occuring in cash vs. debt loads taken on. Plenty of cash floating around. Just no one buying credit- either in stock equities or loans. A indication of very little long term growth confidence. Kudos- to the writer.
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8-10-2009 @ 8:13PM
Richard said...
It seems to me that the average price-earnings ratio of the S&P 500 in excess of 140 is a bit scary, if true?
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8-10-2009 @ 9:22PM
MrDoughnut said...
I think the decimation of the middle class spells the end to Wall Street. Each time that the economy dumped the situation has gotten worse not better in the job market. It's like we reached a new level on a lower rung. I think you can expect a lot more big companies to go under. We were just a few years past the 2000 tech bubble then in 2006 signs of trouble started creaping up. The real economy for most Americans hasn't improved much for the last 20 odd years.
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8-11-2009 @ 12:38AM
ObamaNoFDR said...
We're overdue for a MASSIVE depression 8 to10-yrs min. Buy everything you need, NOW!...and pay cash. Home, boat, trailer, pup tent, whatever. Food supplies will be gone in 3-4 yrs. Better have a backyard/land that has a sustainable garden. That's the only growth you'll be talking about. Oh and guns...lots and lots of guns (and 10 yrs worth of ammo) you may need this to make a withdrawal from your bank/401K/IRA account.
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8-11-2009 @ 10:24AM
Miriam Alfonso said...
DESPERATELY LOOKING FOR GOOD PEOPLE WHO UNDERSTAND THAT INLY IN UNION THERE IS POWER.
I AM A HIKER, NATURE LOVER,50 YEARS OLD DIVORCED AND HOPING TO MAKE FRIENDS FOR THE HARD TIMES AHEAD.
PLEASE CONTACT ME AT MY EMAIL :
MiriamEtienne@aol.cfom
I WENT WALKING AFTER COMPLETING MY MARKETI NG PROMOTIONS THAT ARE NOW ALMOST ALL CANCELLED FOR............LACK OF MONEY ON THE BIG ADVERTISERS FUNDS............YES PEOPLE EVEN BIG COMPANIES ARE COMPLETELY GOING IN THE RED OR GETTING THERE.
i HAVE DONE MARKET STUDIES IN ONCE VERY AFFLUENT TOWNS SUCH AS :
WESTWOOD, EMERSON, RIVEREDGE, PARAMUS, RIDGEWOOD, ENGLEWOOD, FORT LEE, AND I STILL HAVE ONE PENDING AT THE END OF THE MONTH IN :
NORTHVALE NJ..............I DO NOT SEE A PRETTY PICTURE ON OUR HORIZON, SHOPPERS AT MALLS AND SUPERMARKETS ARE NOT > BUYING ANYTHING UNLESS IT IS A CLOSE OUT SALE OR THE ITEM IS ABSOLUTELY NEEDED IN THE HOUSEHOLD AND HAS TO BE PURCHASED.............WITH WHAT i HAVE NOTICED:
CREIDT CARD.
I WELCOME THE THOUGHTS OF ALL OF YOU " DEEP THINKERS " LIKE MYSELF OUT IN THE NORTH JERSEY AND NEW YORK ( METRO ARA 0 THAT IS CLOSE TO WHERE I LIVE..........." TH EMEADOWLANDS "............YES i TELL YOU THIS NOW.............GET USED TO RIDING A BYCICLE...........IF YOU DONOT HAVE ONE BUY IT NOW...............BUY THE THE CIGAR LOOKING PUMP TO REPLENISH THE AIR IN THE TUBES............THINGS ARE WORTH THAN YOU GUYS THINK............UNLESS WE ALL START:
BUYING....................MORE PLACES WILL CLOSE...............I WAS BORN IN ..............CENTRAL CUBA AND I LEARNED FROM MY GRANDPARENTS WHO WERE ALL FROM NOTHERN SPAIN, FRANCE AND CANARY UISLANDS THAT WHAT HAPENED IN EUROPE DID HAPPEN TO THEM AGAIN IN ..............CUBA AND NOW MY 87 YEAR OLD MOTHER IS FREAKING OUT................TELLING ME:
" WHAT ARE WE GOING TO DO WHERE ARE WE GOING TO MOVE FROM HERE IF THINGS GET MUCH WORSE ? "
i TOLD HER WHAT I AM TELING EVERYONE NOW................STAY PUT..............DO NOT MOVE...............MAKE FRIENDS WITH YOUR NEIGHBORS...............LEARN HOW TO PLANT POTATOES, CORN, TOMATOES, START WALKING, IS TIME TO BO BACK TO THE OLD DAYS WHEN PEOPLE WERE BONDED AS A ONE FAMILY IN A TOWN.
PLEASE ANSWER MY MESSAGE..................SOMEONE OUT THERE HAS TO CARE ABOUT OUR COMMUNITIES AND OUR LIVES.
MiriamEtienne@aol.com
UNITED WE STAND STRONG.
GOD BLESS AMERICA !
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8-12-2009 @ 10:02AM
perfessa said...
"I'm wary of both extreme euphoria and gloom because they reflect emotion more than reality."
reminds me of a wall posting in a Vienna restaurant, on the way to the rest rooms:
"Reality is a hallucination, caused by acute lack of alcohol".
After reading reams of blogs on the stock market and finances, papers and TV, this seems a fitting conclusion. I am about to pull my little investment from this market, even at more than 20% loss. There must be something more useful to spend it on.
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8-12-2009 @ 11:40PM
Noor said...
Well it is very difficult to identify the movement of the Stock market. No one can predict it correctly. As You told, the exact opposite of our expectation will happen. Stock market is doing fantastic now and that is more because of good show by Obama administration in the Unemployment and real estate sector. The positive feeling is spreading inside the negative market. The market which was waiting for a good sentiment is reacting.
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10-04-2009 @ 7:23AM
Ramanji said...
Sir,
I completely agree with your point of view.Unless transparency
is returned to the bail out packages and reforms the stock market will be like a rudderless ship.Real consumer spending alone only will lift the mood of the stock market or else everything is only a passing cloud.
Ramanji
www.stockresearch52.wordpress.com
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