Great Ponzi.com

2010-02-01

Market has run out of steam; consider selling


Bull Index shows weakest market in 9.5 months

Click the chart to enlarge

The GreatPonzi.com Bull Index currently shows a rapidly deteriorating market, and the lowest reading since April 13, 2009 (9.5 months ago). The market had firmly been in “bullish” territory ever since April, and this is the first time the market has fallen out of bullish mode, according to my technical indicator. In other words, this current weakness looks different than the previous corrections in 2009, none of which dented my Bull Index at all.

Many market indexes have declined below their critical 100 day moving averages, picking up volume as they have done so. The S&P 500, TSX Composite, and global indexes such as EFA and EEM have all fallen below this moving average. The major market indexes are showing a string of many distribution days, indicating significant selling bias.

Market leaders AAPL and GOOG had incredibly low volume during the entire rally. The last couple of weeks broke that trend of declining volume, with higher volume bringing negative weeks. This is bearish and shows the market's commitment to sell, even with happy GDP numbers and iPads.

You should consider selling stocks and corporate bonds

There is a good chance that the market is running out of steam. Stocks are currently priced very optimistically for significant earnings growth. After the incredibly low 2008 earnings, the modest recovery in 2009 (backed by record stimulus spending and central bank support) looked like tremendous earnings growth. It will be very hard to attain the same earnings growth into 2010 and 2011, especially with stimulus ending. However, this is the current expectation: strong earnings growth.

Those expectations strike me as wildly over-optimistic.

The pricing of corporate bonds is harder to explain. Just about any way you look at it, corporate bonds are wildly over-priced on the heels of their historically unprecedented rally. Whether they are “investment grade” corporates or junk bonds, all of these companies are still very dependent on short-term financing and could face another insolvency crisis in the blink of an eye.

Your job is at risk; avoid the double whammy

A big reason I suggest selling stocks and corporate bonds is the close link to your employment income. One of the reasons you still have a job today is that your employer expects the 2009 trend to continue, and earnings to stay strong in 2010. Your stock/mutual fund assets have gained substantially due to the same optimistic expectation.

Think about what happens if reality falls short of expectations, and 2010 earnings are poor. Then you get hit with a double whammy: your stocks and corporates fall in value, and you may lose your job too.

To me, it seems like a “no-brainer” to sell your risky assets at the height of the current optimism. If corporate earnings remain strong, then your job is relatively secure. However, if earnings fall back towards 2008 lows, you may lose your job but can at least recover value from stocks... if you sell them while expectations are still positive.

Holding stocks and corporate bonds now is like saying: I am so confident in a lasting global recovery that I am willing to bet both my job and my investment assets, at the risk of losing both if I'm wrong.

How great was the 2009 rally, anyway?

We have heard much hype about the recovery rally, but has it really been that amazing?

Looking at many global indexes, even those who joined the rally pretty early have realistically only seen 4 months of usable gains (very few buyers catch the exact bottom; most bulls probably joined the party around May). While the US stock indexes have done better, for many global investors this has been a crappy rally and bulls have little to show at the end.

- Perpetual Bull