Eight Contrarian Signs That Call a 2011 Stock Rally Into Doubt

Contrary signs about a 2011 stock rallyExpectations for a continued rally in U.S. stocks in 2011 are front and center, and the reasons for the ebullience are numerous: U.S. GDP growth has returned to prerecession levels, and consumer confidence and sales are both rising.

But beneath the bullish sheen of positive consumer sales, a number of key statistics and indicators are bearish or neutral. Investors might want to balance the widespread confidence in a 2011 rally by looking at these indicators:

1. Industrial production and capacity utilization have both stalled, according to Federal Reserve data. The Ceridian-UCLA Pulse of Commerce Index has declined from the second-quarter highs, suggesting the recovery that began in mid-2009 has flattened. As this chart illustrates, the Ceridian Index turning down is a negative indicator for future growth.



2. The Baltic Dry Index (BDI) has been in a downtrend since June. The BDI is generally viewed as a reliable proxy for the global shipping industry. When demand for shipping is strong, the BDI rises; when demand to ship goods falters, the BDI declines. There's simply no way to interpret the BDI's steady deterioration as a bullish reflection of rising global trade. Rather, the declining BDI suggests global demand for shipping is slipping significantly.



3. Interest rates are rising. Despite the Federal Reserve's stated goal of maintaining a low interest rate environment, rates have risen sharply recently. Rising rates increase the cost of doing business and are generally viewed as negative for housing because rising mortgage rates mean potential homebuyers will be paying more per month.



4. Oil and gasoline have risen to levels that some analysts see as negative for growth. There's a contradiction in rising oil prices: Though higher demand is considered evidence of strong economic growth, more expensive oil acts as a broad-based "tax" on the overall economy. The incomes of consumers and enterprises are reduced as more of their money is diverted to pay for oil, gasoline and diesel fuel. That leaves less money for consumers to spend on other goods and services.

At least some analysts reckon that oil breaching $90 per barrel negates the modest growth in GDP registered in the previous quarter. This chart of the U.S. Gasoline Fund, a proxy for the cost of gasoline, illustrates the sharp, sustained rise in fuel prices since August.



5. Property taxes and other state/local taxes are rising. As I documented here recently, property taxes are rising despite the deep declines in property values. Faced with massively underfunded pension obligations, state and local governments are passing significant tax increases -- often over 10% per year. These tax hikes reduce the effectiveness of the recently passed federal tax cuts as a form of economic stimulus.

6. Retail investors are shunning U.S. stocks. Spooked by the 40% declines in the stock market in 2008-2009 and the "Flash Crash" in May 2010, noninstitutional investors have been pulling their money out of U.S. markets. This lack of participation means fewer buyers are available to drive stocks higher.

7. Margin debt is at the highest levels since September 2008. A reflection of strong appetite for risk, margin debt is based on the cash value of a brokerage account portfolio, and when investors borrow against their portfolios to buy more securities, it's generally seen as bullish. As stocks increase in value, then the amount an investor can borrow on margin also increases.

The potential downside of high margin debt is severe: If stocks swoon, investors with heavily margined portfolios receive a "margin call," which requires either an infusion of cash into their account to compensate for the decline in value, or the sale of securities to reduce the margin debt. Margin-induced selling tends to snowball, as falling markets trigger more margin calls, which then cause more selling.

8. Investor sentiment remains at extremely high levels. As I reported earlier in the month, high levels of bullish sentiment correlate to market tops, and extremes of bearishness correlate to market bottoms.

While many market seers see sustained growth and rising stock prices ahead in 2011, investors should look at these eight factors before rushing to join the crowd around the bull's punchbowl.

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309 Comments

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jrj90620

You didn't even mention China and how it's efforts to slow it's economy should effect demand for goods by China and slow the world's economy.

December 29 2010 at 12:15 PM Report abuse rate up rate down Reply
frankengreat

Bull markets climb a wall of worry and everything outlined in this article is the wall of worry that is being climbed. Technically the market has broken out to the upside as it has broken through the neckline of large 3 year inverse head and shoulder patterns on the S&P, DOW and the Q's. Furthermore the markets have been sitting above the necklines on these indices for 2 months indicating that the breakout is real and the secular bear market in stocks may be over.

Another factor that will cause the market to rise is the devaluation of the U.S. dollar. As the dollar loses value everything denominated in dollars automatically increases in value and that includes U.S. stocks. No market goes straight up, but this one appears to be headed much higher. There are still many bears out there who are expecting a massive selloff or a retest of the bear market lows. I suspect they are going to be severely disappointed.

December 28 2010 at 11:43 PM Report abuse rate up rate down Reply
Vance Thomas

The Following is the type of request to our maker that I referred to in my previous comment.
The Lord’s Prayer

Our Father which art in Heaven, Hallowed be thy name.
Thy kingdom come. Thy will be done in earth,
As it is in heaven. Give us this day our day our daily bread.
And forgive us our debts, as we forgive our debtors.
And lead us not into temptation, but deliver us from evil:
For thine is the kingdom, and the power,
and the glory forever.
We further ask that you bless all Nations in the World, all people, our brothers and sisters, our officers, our staff, our families, our friends, and our enemies, whom we forgive.
Surround us and protect us all, with your Holy Angels, protecting us from all evil and harm, 24 hours a day, seven days a week, all year long, every year until eternity.
We further ask and thank you Lord, for World Peace, for the Abundance and Prosperity you have given us and ask that you continue to Bless us all with Abundance and Prosperity all of our days, let Peace, Abundance, Prosperity, Heavenly Wisdom, and Righteousness Reign throughout the Entire World, remove all troubles. Take all suffering away, Give us visions that we will not perish,
Let the wicked fall and the righteous reign.
Protect us from all things harmful to us,
both real and imaginary, seen and unseen, at all times.
Bless us all, keep our minds, our bodies,
and our spirits whole and in perfect Health.
We thank you Lord, AMEN

December 28 2010 at 3:56 PM Report abuse rate up rate down Reply
Vance Thomas

Hello!!!
We are only fooling ourselves believing that we are actually in charge of any aspect of our lives except the part of making the wrong choices, our maker, whom our pledge of alleigance says there is, goes something like this, "one nation under God indivisible with liberty and justice for all". So just get our lives back to the basics and ask our maker to make our lives more comfortable in every aspect, health, security, economically, peace, ask for abundance for all people the world over, etc.. We have not because we ask not. It is really that simple. All the graphs, speculation, etc., tell me that we as a population, one nation, have strayed off track. Just do a Reality Check!

December 28 2010 at 3:31 PM Report abuse rate up rate down Reply
Azhot1

You have the floor, westparkin. So, say something intelligent! We are the U.S. S-t-u-p-i-d. I wont fall for the market story until there is a big correction on some of the overbloated stocks and some Real change, coming from Washtington! Love the story on AOL today where about only HALF of Americans are filing their taxes in January, and I'll bet for those getting a tax return (child income tax credit) and the big redistribution of taxes flow....I'll just bet that the actual number of Tax paying Americans is even smaller! Overhaul the stupid thing. Have EVERYONE pay something except for the very very poorest among us (who don't pay taxes anyway), and give several hundreds of I.R.S. workers the boot.

December 28 2010 at 2:35 PM Report abuse +2 rate up rate down Reply
ajax

I like #5. They are raising my property tax to pay for public pensions for overpaid public employees. Where is my pension?
We're always bailing someone out in the government? Make them richer and make me poorer

December 28 2010 at 12:51 PM Report abuse +6 rate up rate down Reply
MSmailbox

How many naysayers are putting their money where there mouth is, and going short?

December 28 2010 at 12:36 PM Report abuse -1 rate up rate down Reply
1 reply to MSmailbox's comment
REEDWIRELINE

CIF=cash in fist...UOG= until omama gone.....got out 11/04/08 made a ton shorting election...saved or created $210K...no employee Rape and Pilage cost!!!!

December 28 2010 at 3:03 PM Report abuse +1 rate up rate down Reply
Gumby

939 comments !!!!!#@%!@#!

December 28 2010 at 10:45 AM Report abuse rate up rate down Reply
Charlotte

Yea we know all about government waste but we'll continue to elect the same people into office. Why??? Because of a political standing on liberal or conserative. HE/She is of my party so forget the costs. Ask if your Congressman or Senator is having trouble buying a loaf of bread or paying their mortgage. Bet their car is new almost every year. America had better wake up soon.

December 28 2010 at 10:27 AM Report abuse +2 rate up rate down Reply
mike shaffer

I PREDICT A FULL BLOWN STOCKMARKET CRASH IN 2011 DUE TO THE INCOMPETENT HO'S RUNNING THE COUNTRY INTO BANKRUPCY AS WELL AS A BANKRUPT EUROPE, ALSO WITH MORE WAR'S TO FIGHT,[KOREA,IRAN] MAYBE CHINA, WHEN THEY STEP IN TO DEFEND THERE BROTHERS.THE MIDDLE EAST WILL SEE A WAR SENDING THE PRICE OF OIL INTO THE HUNDREDS, HIGHER UNEMPLOYMENT,THE FED PRINTING SO MUCH MONEY IT BECOMES WORTH ONLY THE PAPER ITS PRINTED ON,HALF THE STATES IN THE UNION ARE IN THE RED DROWNING WITH DEBT.FOOD PRICES WILL SORE CAUSING THE AMERICAN PEOPLE TO STARVE,AS OF TODAY FORTY NINE MILLION AMERICANS GO TO BED HUNGERY EACH NIGHT 22 MILLION ARE CHILDRED WHILE THE HO'S RUNNING THIS COUNTRY PAY FARMERS MILLIONS NOT TO GROW FOOD ON ALL OF THERE LAND TO KEEP THE PRICES GOING EVER HIGHER AND IF THATS NOT ENOUGH THE HO'S SEND SHIP LOADS OF FOOD AROUND THE WORLD THAT FEEDS A BILLION PEOPLE ON THE TAXPAYERS DIME WHILE LETTING US STARVE..THE PEOPLE WILL RISE UP AND OVERTHROW THESE HO'S WITH BULLETS ITS THE ONLY WAY TO TAKE OUR COUNTRY BACK AS THE BALLET BOX DOES NOT WORK. ALL MUST STAND UP AND FIGHT FOR YOUR FAMILYS! DON'T TAKE IT ANYMORE THE TIME IS NEAR!

December 28 2010 at 8:37 AM Report abuse rate up rate down Reply
1 reply to mike shaffer's comment
phasejump

Where do you guys dream up that garbage

December 28 2010 at 9:29 AM Report abuse +1 rate up rate down Reply