We have been reviewing various pictures of fading US stock market internals as its sponsorship thins out. Here is another, with the Nasdaq COMP featuring fewer and fewer advancers even as the price of the index rises.
On September 12 we did a heads up NFTRH update about how the EM’s (MSEMF vs. SPX, EEM vs. SPY) was losing leadership and breaking the first level of support. It is still password protected, so no link. Here’s EEM-SPY…
Nominal EEM has since gone on to lose the August low, potentially indicating a bearish trend to come. I shorted this (jumping the gun a little because it had already broken down vs. US stocks) using EEV on Friday.
Excerpted from the September 21 edition of NFTRH, #309, which went on to do extensive technical and macro work across all the key markets…
Last week we noted that Uncle Buck would be front and center in the analysis, not because the strength in the (anti-market) currency was not expected (it was), but because our big picture theme of an ongoing economic contraction had remained intact (ref: gold vs. commodities ratio) over the long-term.
It is important here to remember that NFTRH would only be on its big picture macro themes as long as indictors implied they are still viable. I will be damned if I will let us follow a Pied Piper off an ideological cliff, no matter what readers (including me) might want to hear. We must dedicate to know what is happening, not what our hopes, dreams, egos, etc. think or worse, hope will happen.
The first draft is me on Saturday fighting my way through piles of macro stuff, charts and personal observations, opinions and conclusions. A review on Sunday morning let’s me sit back, try to figure out where I may be confusing people, sounding like a pompous ass or who knows what else is not in the best interest of the work? It let’s me make the report presentable. Anyway, here’s one whacky macro chart from #309.
I love these crazy ones with different colors and mark ups. Note how the 6’s are the only numbers that are the same color on the correlation of the gold-silver ratio (GSR) and the S&P 500. It’s something we noted months ago, but it could be relevant going forward now that the USD is getting in correlation with the GSR.
We take the Way Back machine to a time of normalcy and plenty, in the 50’s when the stock market did okay but savers were paid (through T Bill yields) to do the most prudent thing people in a natural economy can do… save. Ever since 1980 the theme has been for the nation to eat its seed corn, with asset owners getting increasingly more portly in the process and savers nudged ever further out to the margin. The S&P 500 has sure got no complaints these days. It’s in lockstep with policy.
The 10 year view shows savers have been erased from the picture. ‘Screw them’ is the implication as the brave new world of finance follows one rule, ‘asset appreciation or bust!’ In service to asset appreciation has been the duel input of ZIRP (zero rate policy) and a rising money supply, much of which we’d presume was instigated by QE’s money printing and Treasury and MBS asset purchases. S&P 500? Still not complaining.
Guest Post by Chris Hunter
Will market historians look back on the $21 billion IPO of Alibaba – the biggest US IPO in history – as signaling the top of the five-year rally for the S&P 500?
Only time will tell…
But we note with interest that almost half of Nasdaq stocks (47%) are down 20% from their peak over the last 12 months (the official definition of a bear market).
And 40% of Russell 2000 small-cap stocks are in bear market territory.
Guest Post by Michael Ashton
The stock market really seemed to “want” to get to 2000 on the S&P. I hope it was worth it. Now as real yields seem to be moving higher once again (see chart below, source Bloomberg) – in direct contravention, it should be noted, of the usual seasonal trend which anticipates bond rallies in September and October – and the Fed is essentially fully ‘tapered’, market valuations are again going to be a topic of conversation as we head into Q4 just a few weeks from now.
To use an American football analogy, the stock market right now is in an extended position like a wide receiver reaching for a high pass, but with no rules in place to prevent the hitting of a defenseless receiver. This kind of stretch is what can get a player laid up for a while.
Now, it has been this way for a long time. And, like many other value investors, I have been wary of valuations for a long time. I want to make a distinction, though, between certain value investors and others. There are some who believe that the more a market gets overvalued, the more dramatic the ensuing fall must be. These folks get more and more animated and exercised the longer that the market crash doesn’t happened. I think that they have a point – a market which is 100% overvalued is in more perilous position than one which is a mere 50% overvalued. But we really must keep in mind the limits of our knowledge about the market. That is, while we can say the market is x% overvalued with respect to the Shiller PE or whatever our favorite metric is, and we can say that it is becoming more overextended than it previously was, we do not know where true fair value lies.
Guest Video by Tim Knight
Guest Post by Chris Hunter
If the US stock market is overvalued, where are there bargains on offer?
Regular readers will know that we like Russia – where the news is nearly all bad and where, as a result, the stock market trades on a trailing P/E of 5.7 and yields 4.8%.
Let’s get the theory out of the way first…
There are all sorts of ways to complicate this, but as Warren Buffett put it:
Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
Nearly everyone pays lip service to this idea. Almost nobody invests this way.
Guest Post by Chris Hunter
One of the core principles we follow at Bonner & Partners is that “beta is boss.”
As Bill puts it:
Beta – the returns the market delivers – is much more important than alpha – the returns investors look for in excess of market returns.
Investment pros talk about “seeking alpha.” They mean choosing individual investments – usually stocks – that they hope will beat the averages.
Simply put, there’s a time to be in stocks… and a time to be out of them. Same goes for bonds. And commodities. And any other asset class you can think of.
In fact, one of the most important investing secrets you can learn is that these decisions matter most when determining your long-term wealth.
Most investors have no clue about the importance of beta. Instead, they spend most of their time thinking about how to get exposure to stocks, bonds, etc, not about whether they should own them in the first place.
As regular readers will be aware, US stocks (in general at least) are richly valued right now. And that means long-term returns are likely to disappoint.
So, what are the alternatives?