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Melt-Up Or Melt-Down?

  • Written by Syndicated Publisher No Comments Comments
    October 21, 2013

    The last two weeks have provided fuel for both bulls and bears.

    Once again the market proved itself to be right, that the foolishness in Washington was not as important as other factors, like the momentum created by retail investors finally rushing back into the market this year, and the Fed having the economy’s back whenever it stumbles.

    As in ‘don’t fight the tape’.

    Economic reports out of Asia and Europe continue to improve. So the scary 10% global plunge in May and June was actually another buying opportunity rather than the beginning of the end of the long bull market since early 2009.  


    The S&P 500 has now joined the Nasdaq and Russell 2000 in ‘breaking out’ to a new record high.


    The uncertainties of the debt-ceiling debate have been kicked down the road, and next time are likely to be of even less concern.

    The uncertainty of who will replace Ben Bernanke has been settled, with Wall Street’s preference of Janet Yellen to take over.

    The additional economic weakness created by the government shutdown makes it a sure thing the Fed will forget about tapering back stimulus, and may even provide more.

    So, what’s to worry about?

    The bears say plenty.

    That the resolution of foolishness in Washington, and appointment of Janet Yellen, had already been factored into stock prices, as in ‘buy the rumor, sell the fact’.

    That the S&P 500 is selling at 19.2 times earnings, near the high end of its historical range, while earnings growth is slowing. That some highly respected big names like Warren Buffett, Carl Icahn, and Stanley Druckenmiller, are cautioning that the market is getting rich and fully valued. 

    That the surge in social media stocks are taking on the appearance of the dotcom stocks in 1999.

    And so on.

    Maybe the winner of this year’s Nobel Prize for Economics, Robert Shiller, developer of the closely watched Shiller ‘Cyclically Adjusted Price-Earnings Ratio’ (CAPER) can settle the bull/ bear debate.

    Or maybe not.

    On Monday he said, U.S. stocks are vulnerable to losses because they are the most expensive relative to earnings in more than five years.”

    However, the level of his CAPER P/E ratio at the end of September, at 23.7, is still lower than its peak of 27.5 in 2007, and well below its record peak of 44.2 in 1999.

    And he added, “I don’t think one should view it with alarm. One could well, and probably should, in a diversified portfolio, invest in stocks.”

    Other Voices:

    The Financial Times: The Danger of Mixed Signals. . . . . . “Against this backdrop, it seems all too likely that America’s growth will, once again, fail to accelerate. It also means that responsibility for supporting the recovery will remain, disproportionately, with the Fed. Ms Yellen may be forced to consider an expansion, rather than a contraction, of its bond buying. . . . Even if Ms Yellen manages such tensions adroitly, there are limits to what the Fed can do. Central banks can help prop up growth in the face of spending cuts, as they have been doing in much of the rich world in recent years. But they cannot protect an economy against destructive politicians.”

    The Wall Street Journal: “Ralph Acampora, director of technical research at wealth management company Altaira, is back to being bullish because of the old Wall Street adage, “Don’t fight the tape. . . . . Normally bullish, Mr. Acampora, sometimes known as the Godfather of technical analysis, caused a stir in late August when he made a call for a new bear market. . . . At that time, he said he needed to see new highs “across the board” to turn bullish again. So when the Dow Industrials and Dow Transports reached new all-time highs at the same time last month, which he said “reconfirmed” the long-term primary uptrend, he was forced to give up his bearish view. . . . You have to have discipline,” Mr. Acampora said. “As ugly as the Dow got, it didn’t break down. . . . While he doesn’t rule out further volatility in the short run, he now believes any pullback will be shallow, and present a buying opportunity. “We should have a strong rally into year-end. . . . One reason for pause is that the Dow Industrials continues to underperform, and like Mr. Acampora has always said, “Don’t fight Papa Dow.” The Dow was down 54 points at 15320, or still 2.3% away from the Sept. 18 closing high of 15676.94. . . . . The flipside is, the rest of the market looks fantastic,” Mr. Acampora said. “The Dow is going to try to play a game of catch up.”

    Barron’s Ben Levisohn: The Houdini Market Wriggles Free of Bad News Yet Again“There has been the flash crash, the Greek default drama, the U.S. debt-ceiling debacle, the Standard & Poor’s credit-rating downgrade of the U.S., the sequester, the great taper scare, and more. Each we were told, could have ushered in a new bear market. Instead, the S&P 500 squirmed out of the traps and headed higher. And for its latest trick, the market had to avoid the double whammy of a government shutdown and a potential default.”

    “Some investors doubted the market’s ability to wriggle free. They pulled $5.2 billion out of U.S. equity funds in the week ending on Oct. 9, according to the Investment Company Institute; the amount was more than the withdrawal in any single month this year.”

    “Last Wednesday, however, Republicans and Democrats agreed on a deal to reopen the government and raise the debt ceiling, and the stock market surged higher. By the end of the showdown, the S&P 500 had gained 2.4% and finished last week at a new all-time high of 1,744.5, despite high-profile earnings misses from companies such as Goldman Sachs, IBM, and United Healthcare.”

    Richard Sylla, financial historian New York University: “Bull markets have a certain momentum to them and can brush off inconvenient things.”

    Alan Greenspan, in interview regarding his new book ‘The Map and the History’: “Studying the results of herd behavior [last year] provided me with surprises. I was actually flabbergasted. It upended my view of how the world works. Fear has at least three times the effect of euphoria in producing market gyrations. I wouldn’t have dared write anything like that before.”

    What was behind 10-minute 3% spike in gold early Thursday?

    Gold spiked up $40 an ounce on Thursday. But if you wanted in you were too late for that day. It all happened in ten minutes. Traders and exchanges are puzzled at how it happened.

    Reuters reported that “In the early hours of the New York morning on Thursday, when scarcely a few hundred lots of gold futures are usually traded, a wave of buy orders worth over $2.3 billion surged into the market. Prices soared 3% [$39 an ounce] in just ten minutes, puzzling traders and investors who have been rattled by a series of similarly abrupt, and largely unexplained trade swings over the past two weeks. . . . . . The half-dozen mammoth orders whipsawed prices and disrupted trade in Comex futures, a market already edgy about gold’s fading safe-haven appeal. . . . . . . Traders have offered a host of possible explanations including that it could have been driven by selling by a distressed fund, the unusual low liquidity, deliberate gaming of the market, whether by a rogue trader or a computer-driven algorithm that seeks to overwhelm the system.”

    In any event, it’s interesting that, so far anyway, the spike up was halted at the potential short-term overhead resistance at gold’s 30-day m.a., $1,323 an ounce, that we gave you on Thursday morning’s blog, and went no further.

    It reached an intraday high of $1,322.70. And was back down to $1,315 yesterday.

    But still no explanation for that 10-minute spike-up on a $2.3 billion trade.



    To read my weekend newspaper column click here: New Concerns Will Continue Market’s Volatility

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    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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