By Brett Arends
“Danger, the emergency destruct sequence has now been activated. The ship will self-destruct in t-minus, ten minutes. The option to override automatic detonation will expire in t-minus, five minutes…” — Mother, “Alien” (1979)
Have you ever felt like Ripley — Sigourney Weaver — at the end of Alien? After the monster has wiped out all of her fellow crew members, she decides to kill it by blowing up her spaceship, the Nostromo. She sets the ship’s self-destruct mechanism and races for the escape shuttle — only to find the alien now blocking her way.
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The next few minutes are a hair-raising race against time. As Ripley barrels back through the long corridors of the space ship, “Mother,” the voice of the ship’s computer, ominously counts down the time left until everything will go kaboom in a blinding, space-bending explosion.
The stock market feels a little like this. The higher it goes, the more euphoric the cheerleading, the more the airheaded Gamma-class humans put on the happy face and hum their way to work, the more terrifying it becomes for anyone who actually bothers thinking. (Luckily, this excludes most of Wall Street). At best we feel like Jones, the ship’s cat, getting banged around in a portable cage.
I hate to state the obvious, but stocks are just a claim on companies’ future dividends. That’s it. By definition, the higher they rise in price, the worse a deal they are. (I am amazed this is ever a subject of debate, as it is a tautology). Mom and Pop, with an instinct for self-preservation which suggests human beings are descended from the lemmings, usually pile on board at the peak.
Is it happening again?
Last week I got an email from Jeff Seymour, a former engineer turned money manager.
For the last seven years he’s been studying the math behind a stock market crash. (There’s more to it than that, but that’s the elevator summary). He figured that if you looked at the right indicators, you ought to have a good chance of knowing what was coming. You should, at least, get an edge.
What were the indicators which were flashing red in 1999-2000, just before the collapse, he wondered? What were they showing in 2006-7?
Seymour’s conclusion: There are nine indicators you need to watch. Just nine.
They range from the Volatility Index or “VIX,” a measure in the options market, to the Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI), to the amount of stock that insiders are dumping on the market.
He put them all together in a doomsday machine he calls “the Greedometer.” It tells you just how dangerously complacent and carefree the market has become at any moment. See the Greedometer.
These Greedometer indicators flashed red in early September 2000. If you read the signs — as some of my wiser sources did — you got out before the crash and saved half your money.
They flashed red again in May of 2007. And, again, if your read the signs you got out before the big collapse.
They flashed red again in April 2011, just before the market fell another 20%.
Let’s cut to the case. The Greedometer is flashing red again.
Bright red. Last week it was up to 7900. The maximum possible reading is 8000.
What’s that, Mother?
“Danger. The ship will self-destruct in…”
The VIX is down. Insider selling is up. Advisers are bullish. Margin debt — the amount investors are borrowing to buy stocks — is nearing the all-time, 2007 peak. And the economy is weakening.
Any individual measure can give a false reading. Throw nine of them together, he argues, and it’s a different story. Since 1999 these nine indicators have given no false alarms, and missed no warnings.
(It’s worth adding that the Greedometer isn’t a one-way indicator either. It flashed bright green in 2002-3 and 2008-9, telling you it was a great time to buy stocks. And so it proved.)
OK, so data from 1999 to 2013 is just a brief period of time. I’m not an engineer by education, but a historian. I take the long view.
But the Greedometer’s latest warning isn’t in isolation. I notice that all sorts of alarming bull market signals are flashing ominous warnings. Small-caps hit record highs recently. Mom and Pop are jumping into the market. And every time I run a stock screen of the market, I can’t find any good value stocks. It’s tough. Everything is up.
Meanwhile, everyone I know who predicted the last two crashes is really bearish, and all the bulls are ignoring them (again). This includes the good folks at GMO, a fund shop in Boston, Rob Arnott at Research Affiliates, and John Hussman of the Hussman Funds, who calls the current environment one of the worst in history in which to invest.
Yes, they’ve been gloomy for a while. But so what? The only reason this market’s been booming has been because Fed chairman Ben Bernanke and European Central Bank President Mario Draghi have been pumping the world economy with as much free money as it will hold.
Earlier this week, Federal Reserve minutes were published showing growing concern on the Open Market Committee about the free money policy. Some members of the committee wondered aloud if all this free money might be causing a bubble in financial assets and too much risk taking.
Gee, you think?
Unlike Alien, we don’t get a countdown and we don’t know when this will end, or even how. But it’s enough to be alarmed.
Administrator says:
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28th February 2013 at 10:46 am
AWD says:
I love homey the clown (from “in living color”)
I kinda liked this graph, showing the divergence of the Dow and GDP. According to this chart, the Dow should be at about 1100, not 14,000.
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28th February 2013 at 10:56 am
Stucky says:
I don’t know if this is true or not. But I once read that a sound investment strategy is to do the opposite of whatever the experts say.
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28th February 2013 at 10:56 am
AWD says:
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28th February 2013 at 10:59 am
AWD says:
Buy the fucking dip!!!
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28th February 2013 at 11:01 am
stalker says:
“The last of one’s freedoms is to choose one’s attitude in any given circumstance.”
― Viktor E. Frankl
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28th February 2013 at 11:01 am
AWD says:
We have clowns running this country.
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28th February 2013 at 11:18 am
Eddie says:
Clowns are scary. I don’t care what anybody says.
Well-loved. Like or Dislike:
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28th February 2013 at 11:20 am
AKAnon says:
AWD-Would that be the dip in PMs?
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28th February 2013 at 11:24 am
Administrator says:
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28th February 2013 at 11:37 am
Maddie's Mom says:
I agree, Eddie.
Nightmares for me tonight.
Thanks TBP!
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28th February 2013 at 11:43 am
Stucky says:
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28th February 2013 at 12:02 pm
stalker says:
a lot of red in these illustrations is alarming on a subliminal level. red hair is not pretty, i wonder why the chinese consider red a happy hue? i’m sorry, been watching the arias coverage and can’t get over her flat affect. i learned that a sociopath does not believe others feel pain. i didn’t hear the definition but i believe a psychopath is someone who has no conscience. from what i understand, she is a lot like our masters. she predicted she won’t be convicted. there’s another psychopathic quality, the ability to hynotise others into believing a lie and acting contrary to one’s own interests.
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28th February 2013 at 12:02 pm
Administrator says:
28 February 2013
Chris Martenson: A Steep Stock Market Decline Is Coming
I had this from Adam Taggart this morning. This is in no way an endorsement of Chris’ conclusion. But I respect his work, so I thought I would pass it along to see how it plays out.
Quite a bit of his analysis is correct and I cite him often. I find this market to be ‘thinly bought’ with steady rises on fairly cynical buying, with declines that are steep and sharp.
The fundamentals are very wobbly both in US but especially in Europe. Political leadership is bad to say the least.
So I would say that the right trigger event to a market correction is something that I can see playing out. However I would add the caveat that the nature of the trigger event will shape that correction, especially in the inter-market relationships and actions. This includes type of event and location.
Chris’ scenario works well with a supply/price shock in energy, or a new sovereign financial failure in Europe.
It does not play out as well with a US based trigger event, a trade war, or some stronger erosion with confidence in the dollar reserve currency system, or a civil dislocation. Odds-wise Europe and China are better bets for the locus of the next crisis than the US.
Will the next crisis spring from a private financial occurrence like a bank failure, or a sovereign failure? Or will it be more political than financial, although the two are remarkably intertwined in this corporatist world of ours.
Note the timeframe which is broad enough to encompass any number of events. I would add another month or two, although I would expect that the signs of trouble would be pretty apparent by August, even to the extent of a bubble like environment more obvious than today.
And of course we cannot dismiss the possibility that nothing dramatic will happen, and things will stumble along as they have been, from small crisis to ray of hope, and back. But with increasing levels of background hysteria as I have said we would see.
I am not faulting Chris’ analysis in any way. I am just loath to stick myself to a forecast of a less probable event, given the wide number of variables that can take the storm in this direction or that. However I am on alert, and try to know what to watch, and then watch it.
I have lost quite a bit of money underestimating the willingness of frightened men in positions of power to engage in financial shenanigans, outright fraud, and seemingly irrational support for the rationally unsustainable. And I hope never to forget that lesson. Fiat is a powerful drug.
But there will be no sustained recovery until the financial system is reformed, and so we will continue on in a state of fragility.
La voilà.
“Chris Martenson is issuing an official warning of a major stock market correction within the next few months. He’s only done this once before in 2008.
He’s seeing a convergence of both technical and fundamental data that are flashing oversized risks to the downside for asset prices, despite the Federal Reserve’s money printing mania which is showing signs of hitting diminishing returns.
He expects the fall in equity prices to happen within the May-September window.
This downdraft will be characterized by lots of volatility, formed by market routs and Fed-inspired rescues, alternating until some form of bottom is reached. Along the way there will likely be a flight for “safety” into the dollar and Treasury paper, but only during the first stage of this crisis.
Once a bottom is reached — he expects anywhere from 40% to 60% lower than the current ~1500 level on the S&P 500 — the process will begin to be dominated by rising government borrowing which will cause interest rates to begin to rise.
When that happens, expect capital to flee the paper market for hard assets. In particular, that’s when the upwards price revolution in the gold and silver markets will kick into high gear.”
Warning: Stocks Likely to Crater From Here
Posted by Jesse
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28th February 2013 at 12:16 pm
Administrator says:
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28th February 2013 at 12:18 pm
Eddie says:
“I have lost quite a bit of money underestimating the willingness of frightened men in positions of power to engage in financial shenanigans, outright fraud, and seemingly irrational support for the rationally unsustainable.”
Me too Jesse. Bur we might still have our day.
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28th February 2013 at 12:23 pm
Randy says:
My interpretation of Dow Theory at this time is quite different from the one in the article you posted. Look at his chart. From March to June of last year both the Industrials and Transports had text book Dow Theory corrections. From that point the Industrials went above their March high in August/September but the Transports went above their March high in January of this year, nearly four months later to confirm that the bull market was still in tact.. One of the rules of Dow Theory is that confirmations are most important if they occur on the same day. Four months sends up a warning signal. Since then the Industrials have had another Dow Theory correction and have gone above their previous high. The Transports have not! They would need have at least a three week decline of at least 400 points plus a rally of at least three weeks above their previous high to confirm what the Industrials have done in the last five months. In my opinion Dow Theory is flashing some major warning signals.
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28th February 2013 at 1:00 pm
Thinker says:
I like that USPS ‘creepy clown’ commercial:
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28th February 2013 at 1:09 pm
Administrator says:
Dow Theory Guru: The Trend In The Transport Stocks Is Clearly Bullish
Rob Wile | Feb. 28, 2013, 11:26 AM |
Yesterday, stocks surged with the the Dow Jones transportation stocks — aka the “trannies” — leading the way with a 2.9 percent gain. . saw their largest one-day increase since last summer,
But with stocks within points of all-time highs, lots of people are wondering if a sell-off is imminent.
Rich Moroney, the editor of Dow Theory Forecasts, says the fear is not warranted.
The Dow Industrials reached fresh five-year highs on Feb. 27, while the Dow Transports reached all-time highs on Feb. 19, so the primary trend is clearly in the bullish camp under the Dow Theory. While a move to all-time highs in the Dow Industrials and S&P 500 Index could help extend the market’s run in the near term, all-time highs are not necessary to keep the Dow Theory in the bullish camp.
In a nutshell, the Dow Theory says that if Dow transportation stocks and Dow industrial stocks confirm each other’s movements highs (or lows), a buy signal (or sell signal) has been indicated.
Moroney also says that stocks are not overvalued based on fundamentals. The median S&P 500 stock is at 15-times expected year-ahead earnings — a 4 percent discount to the norm since 2004.
Moroney says he is not 100-percent all in, but does not believe we’re in danger of overheating: “While a secondary correction would not be surprising, the weight of the evidence suggests it is too soon to raise cash aggressively. Our buy lists have 91.9% to 97.5% in stocks.”
Read more: http://www.businessinsider.com/dow-theory-guru-says-its-too-soon-to-sell-2013-2#ixzz2MDeWwPjw
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28th February 2013 at 1:21 pm
Randy says:
Regardless of how bullish the Transports are they have yet to confirm the action of the Industrials over the last 4-5 months. I disagree with Rich Moroney.
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28th February 2013 at 2:10 pm
Administrator says:
Guest Post: Diminishing QE Returns And The Coming 40% Correction
Submitted by Chris Martenson of Peak Prosperity blog,
Warning: Stocks Likely To Crater From Here
I don’t relish the job of constantly pointing out the risks to the equity markets. But since few on Wall Street seem willing (or able) to do this, I’m “making the call” for a market correction, as enough variables have aligned to indicate a high likelihood of stocks heading downwards from here.
I’ve only given one other such warning about equities before, and that was in March of 2008, when I warned of the possibility of a 40% to 60% decline in stock prices by Fall. I am making a similar call today, with the understanding that I am usually a bit early to the game with my views.
Before I get into the details, the broad outline is that I see a case where speculative fevers, propelled by the Fed’s $85 billion thin-air money printing program, have more or less run their course, with the Dow and S&P indexes stalled near their all-time highs. That is, $85 billion a month is what it takes to merely keep the Dow near 14,000 and the S&P 500 near 1,500.
On a fundamental basis, I see numerous signs of consumer weakness, political in-fighting and paralysis in DC, high insider selling, and the return of the retail investor (a.k.a. “greater fool”) to the stock market.
On a technical basis, there are numerous tell-tale signs of a market top, including too much bullish sentiment, waning momentum on multiple timeframes, and too many NYSE stocks being above their 200-day moving average (at least until recently; that’s begun to correct).
(Source)
Triple Top?
The S&P 500 and Dow Jones are both once again near all-time highs…for the third time. The old saying third time’s a charm can work both ways when it comes to the stock market. Sometimes an index will bust through to new highs, and other times it will fail spectacularly crashing to new lows.
We should all be watching the behavior of the major indexes here, because the possibility of a major triple-top failure is quite high, for reasons outlined below.
If the S&P 500 fails at the triple top and breaks down, from a charting perspective the next thing for it to do is revisit the bottom and then make up its mind as to what it wants to do next. The implication here is that a major failure of the S&P 500 will open the possibility of it revisiting the 600-800 level, or some 45% to 60% lower from the 1,500 level where it currently churns.
It will take some time to get to that level, typically 3-6 months, unless there’s some sort of financial accident to hasten things along, in which case it could all be over in a month or two.
Assuming a failure at the triple top, we’ll just have to watch and see what the market wishes to do once it plumbs the bottom once again. For now, the daily and weekly charts of the S&P 500 show waning momentum, and the weekly chart remains in overbought territory (green lines and circles):
These overbought and slumping momentum indicators are headwinds to the Fed’s efforts to keep the stock market elevated.
From a historical standpoint, stocks are cheap when they sport a collective p/e in the high single digits. Currently they are anything but cheap on that basis.
(Source)
With a current p/e of 22, the S&P 500 is on the expensive – rather than cheap – side of things, and is roughly 35% above its long-term average and more than 100% above what we could legitimately call ‘cheap.’
The summary here is that if stocks do indeed retreat from here, a triple-top failure will deliver quite a punishing blow to the current efforts to repair the public’s trust in the stock market as a place to send their hard-earned savings to grow. It would be quite difficult to engineer a run at a fourth top, given the importance of retail participation in providing fuel for the rise of stocks – especially given that the boomers are retiring at the rate of 10,000 per day and drawing upon their investments instead of adding to them.
The younger generation(s) have been the main victims of the high unemployment and general wage stagnation that have been the hallmarks of the Great Recession. It is not likely that they will be able to save and invest at a rate equal to the boomer’s withdrawals, creating one more equity headwind for the Fed to overcome.
Sell in May and Go Away
Of course, another old adage that applies to the stock market is sell in May and go away, which has proven to be a remarkably effective strategy over the years. The average return between May and September is -0.5%, while it is over 12% for the rest of the year.
(Source)
Why this yearly vacillation of returns occurs is open to speculation, but a betting person would have to think long and hard about buying stocks here – with May approaching and the Dow and S&P at all-time highs – rather than staying on the sidelines and then buying back in September or October if one was so inclined.
However, given the macro forces at play at this time, this May-to-September period could easily offer much more dramatic losses than 0.5%. I am personally thinking as much as two full orders of magnitude greater, as -50% is right in the middle of my target window for losses.
As always, the best time to begin repositioning one’s portfolio is before any big moves get underway, so I personally would not wait until May to make adjustments, assuming one was of a mind to do so.
Whether or not you forego selling stocks, lighten up your positions, or take on some form of portfolio protection in the form of puts or inverse ETFs, these seem like good things to do before April is over.
Danger Ahead
Technically stocks are overbought. Fundamentally, the picture is even worse: they are facing a litany of economic drags (including weakening GDP growth, higher taxes, the impact of Obamacare, sequester cuts, high gasoline prices, chronic unemployment, etc.) and robust insider selling. We explore these fundamental risks and their likely impact in great depth in Part II.
For all of these reasons, equity markets face a very high chance of falling over 40% between now and fall of 2013. (Yes, I’m aware of how extreme a price prediction this is.)
While there’s always a chance that the Fed can keep things magically elevated – and they’ve done a very good job so far – it is my view that they cannot do this for much longer without a serious correction to justify an even larger program of overt and covert intervention.
In Part II: How the Market Failure Will Happen, I detail how the pattern I expect to see will play out – and why I expect the fall in equity prices to happen within the May-September window. This downdraft will be characterized by lots of volatility, formed by market routs and Fed-inspired rescues, alternating until some form of bottom is reached. Along the way there will likely be a flight for “safety” into the dollar and Treasury paper, but only during the first stage of the next crisis.
Once a bottom is reached – again, this might be anywhere from 40% to 60% lower than the current ~1500 level on the S&P 500 – the process will begin to be dominated by rising government borrowing, which will cause interest rates to begin to rise.
When that happens, expect capital to flee the paper market for hard assets. In particular, that’s when the upwards price revolution in the gold and silver markets will kick into high gear.
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28th February 2013 at 4:07 pm