Most Signs Point Down

Most Signs Point To A Significant Market Decline Ahead

We would ignore all of the talk on Wall Street and in the media about whether the stock market is in a bubble. After all, that’s just a matter of semantics, and whatever we call it, the market is overvalued, overbought, and overly bullish at a time when the economy is slogging along at an inadequate pace, and depends almost solely on the prospect of continuing Quantitative Easing (QE) to continue its upward move.

The market doesn’t have to be in a bubble in order for it to be on the precipice of a significant decline. Of all the cyclical market peaks since 1929, only the tops in 2000 and 2007 were looked back on as being bubbles. Most of the other market peaks occurred with the P/E ratio ranging between 18 and 21 times reported cyclically-smoothed GAAP earnings, compared to a norm of 15 times and bear market lows between 7 and 10 times. At today’s market close the P/E ratio is 20.6 times earnings.
That’s high enough to be a potential market top, especially given existing fundamental and technical conditions.

Technical conditions also point to a vulnerable market. Breadth has been narrowing and did not confirm new highs in the averages. Daily new stock highs peaked in May and recently have been trending lower. The Russell 2000 has been lagging the large-cap averages. Some speculative high-P/E momentum stocks have recently been hit hard. Tessler is down 37%, Cree 27%, Fleetmatics 26%, Facebook 15%, and Linkedin 14%. 
Investors Intelligence bulls have averaged a historically high 54% and bears 16% over the past four weeks, numbers indicative of market extremes. According to Vanguard, investors, as a group, have a 57% allocation to equities, an amount exceeded only twice in the last 20 years----the late 1990s and prior to 2007-2009.

 My view:

While we certainly could go higher from here in the general market, it seems that the risk level is getting rather high.

With all the interference in normal market operations by central bankers, it is difficult to say if we are at an intermediate or long term top.  The upward momentum seems to be hanging by a hair in my view.

Given the current situation, we could finally see precious metals rise as the risk off lever is pulled in equities.