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SPX Topping Extremes
The levitating stock markets continue to seductively entrance traders, powering to new nominal record highs day after day after day. No one believes a meaningful selloff is even possible anymore, thanks to the vast deluge of central-bank monetary inflation. Sheer euphoria has set in as all perception of risk has vanished. This makes these stock markets extraordinarily dangerous, they are truly at topping extremes.
As of Wednesday, the flagship S&P 500 stock index (SPX) had rallied to new nominal record highs in 11 of the past 13 trading days. It blasted 4.8% higher over this short span. If sustained for an entire year, this blistering rate of ascent would nearly double the stock markets! This latest euphoric surge extended the cyclical stock bull that was born way back in March 2009 to a massive 145.2% gain over 50.2 months.
This move, particularly the one-sided 22.6% melt-up in the last 6 months, has bred unmistakable euphoria. Wall Street vehemently tries to deny this truth, but the definition of euphoria is “a feeling of great happiness or well-being, a feeling of great elation”. Does that not describe the outlook for the stock markets today? There are no bears left, everyone is incredibly bullish and expects no material selloffs.
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Super Force Signals
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Weekly Market Update Excerpt
May 17, 2013
Morris Hubbartt
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Super Force Signals
A Leading Market Timing Service
We Take Every Trade Ourselves!
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Weekly Market Update Excerpt
May 10, 2013
Morris Hubbartt
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SPX Topping Valuations
As the US stock markets keep on levitating, the bulls continue to rationalize this inexplicable melt-up by claiming stocks are still cheap. They use this as a justification to buy high. But is this true? Not by a long shot! Today the US stock markets are just as expensive in classic valuation terms as they were back in late 2007 when the last cyclical bull topped. That led to a brutal cyclical bear, the same risk faced today.
When investors talk about stocks being cheap or expensive, they are referring to valuations. This concept reveals how any individual company’s stock price compares to its underlying earnings or dividends. Since the only way to multiply capital in the stock markets is to buy low and sell high, prudent investors want to pay as little as possible in stock price for each dollar of profits. So they carefully watch valuations.
The most common and most important valuation measure by far is the classic price-to-earnings ratio. It is as simple as it sounds. It takes any stock price and divides it by that company’s annual earnings per share. The resulting P/E ratio shows how expensive that company’s underlying profits are. A P/E ratio of 20x, for example, indicates that each $1 in annual profits costs investors $20 in stock price to purchase.
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Margin debt and the next stock market crash
The latest fear on Wall Street is that record levels of margin debt may end up toppling the stock market rally.
NYSE margin debt recently reached its highest level since 2007 before the last major stock market peak and credit crash. Stephen Suttmeier, technical research analyst at Bank of America, noted that margin debt, rose 28% in March from a year ago to $380 billion. That figure is slightly below the July 2007 peak of $381 billion, although analysts speculate that April’s margin debt totals (which haven’t yet been released) have already surpassed this mark.
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Super Force Signals
A Leading Market Timing Service
We Take Every Trade Ourselves!
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Weekly Market Update Excerpt
May 3, 2013
Morris Hubbartt
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Gold-Mining Margins 3
Gold mining is a very tough business. Not only is it highly capital-intensive and chock-full of environmental risks, its revenues are entirely at the mercy of a volatile commodity. It requires some serious mettle to succeed mining gold.
But despite super-high barriers to entry and the countless risk factors that come with mining, the world needs gold, and somebody’s got to produce it. And believe it or not, a lot of money can be made in this business.
At a high level gold mining is like any other business. Produce your product at costs less than what you sell it for, and you ought to prosper. And the wider that spread, the more you prosper. But unlike most other business, the “what you sell it for” is an uncontrollable variable that can violently move in either direction.
For gold miners the dangling carrot is a rising gold price. And naturally the best of times ought to occur over the course of a bull market for the metal. Gold has of course been party to one heck of a bull run over the last decade or so, with its price soaring by a staggering 638% from its 2001 low to 2011 high. Given this kind of gain, many gold miners have easily chomped that carrot on the way to big gains of their own.
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How the Fed creates bull and bear markets
Bull and bear markets don’t just happen – they’re created by the Federal Reserve. While few investors dispute the power that Fed interest rate policy has on the market, the extent to which it influences the direction of stock prices in both directions is often downplayed. Moreover, the health of the economy is often decided by the Fed’s interest rate policy.
While it’s no secret that loose monetary policy on the Fed’s part benefits stocks and can lead to credit bubbles, researchers tend to underestimate the effect tight money policy has in creating market crashes and economic recessions. Restrictive money policy on the Fed’s part has frequently led to falling stock prices. The extent and duration of the monetary tightness is what determines the severity of the bear market. The longer the Fed restricts money, the more severe the downturn will be.
Consider the bear market of 1973-74. The Dow Jones Industrial Average experienced a decline of 40 percent, which at the time was the worst bear market since the Great Depression. The Dow peaked in early 1973 at an all-time high of 1150 before commencing a Chinese water torture type decline for the next two years. The decline was precipitated by tight money on the part of the Fed, which began raising interest rates in early 1972.
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Apr 30, 2013
- Recently, many bullish gold analysts have started questioning their own theory that money printing causes inflation.
- Commodity prices have fallen, despite accelerated QE. I would argue that money printing does cause inflation, but only if what is printed overwhelms the assets that are destroyed, in global markets.
- The Fed continues to buy billions of dollars of illiquid and arguably-worthless OTC derivatives each month, with printed money. If the Fed printed more money than what is required to purchase those assets, inflation would likely be much higher than what it is now. So far, that’s not happening.
- Quantitative easing is not the same thing as just printing money and pushing it into the banking system.
- The inventory of marked-to-model OTC derivatives held by commercial banks is gigantic, so it could be many years before serious “cost push” inflation envelops America.
- The Fed believes in a business cycle that lasts for about 8 years. The last cycle probably ended in 2007, which means that the current upswing could continue to about 2015.
- From 2015 onwards, the Fed is likely to become much more dovish than they already are, in an attempt to counter a likely downturn in the business cycle.
- The actions of global central banks, in the 2015-2022 timeframe, are likely to usher in cost push inflation. Clearly, investing in gold requires lots of patience!
- Please click here now. You are looking at my monthly “big picture” HUI chart. I’ve lighted the price zones where gold offers value with blue HSR (horizontal support & resistance) lines.
- Also, note the action of the Stochastics indicator. I call this situation, “Close, but no cigar!” A crossover buy signal for long term investors has not yet been generated, but it’s very close.
- Many bank economists and technical analysts are stating that the current gold rally will fail, and gold will break the lows near $1320. It’s hard to know how such a decline would affect gold stocks, but I doubt it would be a positive experience for investors.
- Put options are like fire insurance; nobody likes to pay the premiums, but if there is a really serious fire, you’ll be glad you bought them.
- If you are afraid that gold could fall and break the $1320 area lows, you may want to consider looking into this type of insurance policy, for your portfolio.
- Cash is another form of insurance. The gold market is probably many years away from offering a “back up the truck” type of market to investors.
- I wouldn’t be overly concerned about drawdowns (gold is a high quality asset), but some cash should be kept on hand, so you can buy more gold if it goes surprisingly lower.
- In the short term, gold stocks are grinding higher, but volume is a big concern. Please click here now. That’s the GDX daily chart. Some technical analysts see a bearish flag pattern in play.
- On up days, volume has been stronger than on down days, but the overall pattern is one of declining volume, and that’s bearish.
- My “stokeillator” is highlighted at the bottom of the chart. It suggests that even if gold stocks are “doomed” to make fresh lows, the rally could continue further.
- Please click here now. This chart provides a closer look at GDX, using 2 hour bars.
- Note the top of the price gap at about $32. If you were able to buy some stock at lower prices, I would book some profit at $31.90, $33.50, and $35.25.
- Many physical metal enthusiasts have noted the enormous surge in demand in Asia and at mints around the world, but most bank analysts are projecting lower prices.
- I think gold needs to consistently trade above $1500 to put some real fear into the bears. So far, that hasn’t happened.
- From the $1590 area highs, gold fell about $270, to the $1320 zone. It’s retraced about 60% of that decline now, and Fibonacci traders are probably quite aggressive sellers in the $1480-$1500 area. I suggest very light selling now, and more between $1500 and $1550, if we get there.
- Gold probably can get over $1500 on this move, but only if both the FOMC meet and Friday’s job reports provide more bullish fuel to the “golden race car”!
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Super Force Signals
A Leading Market Timing Service
We Take Every Trade Ourselves!
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Weekly Market Update Excerpt
April 26, 2013
Morris Hubbartt