There Is No Bubble in the U.S. Stock Market, But...
One of my personal pet peeves about market pundits these days is the preponderance of bubbles being sighted. Nary a day goes by where you don't see an article on the major financial sites about a bubble in this or a bubble in that. The problem is that almost by definition, when a bubble is forming, nobody sees it.
Think back to the heady days of early 2000. Do you recall an uproar about the new metrics analysts were devising to tell us that valuations in dot.com stocks (price-to-eyeballs was a thing) weren't a problem? Lest we forget, Mr. Jim Cramer was busy telling anyone that would listen to buy baskets of technology stocks - that way you wouldn't miss out when one exploded to the upside!
Then there was the housing bubble. Yes, John Paulson did indeed get that one right. But if you will remember, he was VERY early and nearly went bankrupt trying to play the short side of the housing game. (Thank goodness Goldman Sachs came to his rescue and built all those securities designed to fail for him!) And here's a question, did you or anyone you know raise a stink about the value of your homes persistently rising over that 3-4 year period?
In case it isn't obvious, the point is that there weren't websites filled with warnings during either of those bubbles. Yes fans, THOSE were indeed bubbles and by now, everybody on the planet knows how things turned out. Heck with a little luck and/or the help of a few algo-induced buy programs, the NASDAQ might actually get back to the high it hit 15 years ago soon!
What About Today?
My apologies for the digression into what will likely be perceived as ancient history. Getting back to the present, the question of the day is if there are bubbles forming in today's markets.
The argument raging currently is that central bank intervention, which many argue now borders on manipulation, is either creating, or will create, "unintended consequences" (analyst speak for "bubble") in many areas.
It is hard to argue that the world's central bankers aren't trying to move the prices of certain assets higher. Heck, one of the clear purposes of Ben Bernanke's early efforts after the 2008 crash was to move the prices of stocks and real estate higher. His goal was to avoid a Japanese style deflationary cycle - at almost any cost.
So, in an epic quest of almost biblical proportions, Bernanke's bunch invented measures to pump cash into the U.S. economy. And sure enough, the plan worked as the stock market now appears to be pretty darn healthy.
S&P 500 - Monthly
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The question, of course, is if stocks are now in a bubble. While the argument can indeed be made that stocks are overvalued by some measures, the fact that there is a very public debate occurring on the subject suggests that the stock market has not reached the frothy state seen at bubbly tops. Remember, you can read articles about why the stock market is about to crash almost daily on even the most reputable financial websites. And the bottom line is that this just doesn't happen during a true bubble.
While the value of real estate has not advanced to the same degree as the stock market - likely due to the fact that prices had gotten well ahead of themselves during the mid-2000's - most homeowners are likely feeling a little better now about their homes from a financial perspective. However, to say that real estate is now in a class-wide bubble is a little silly.
So, I will stand up this morning and pronounce that there are no bubbles at the present time in either the real estate or stock markets.
What About Bonds?
On the other hand, the bond market may be a completely different story!
The potential reversal of the now 30+ year-old secular bull market in bonds may be the most well planned for non-event in financial history. For years now, pundits have been issuing warnings about the potential damage to the investing public when bonds reverse and begin to revert to the mean.
However, to the frustration of the bond bears out there, the debacle in bonds that was supposed to occur when the economy recovered just hasn't happened.
Why not, you ask? The answer is simple, global QE.
Yep, that's right, the trillions of dollars, yen, pounds, etc. that have been printed over the past few years needed a home. The key is that a fair amount of that freshly minted cash has wound up in the U.S. stock and bond markets. And with the ECB about to crank up the printing press to the tune of €60 billion a month starting in March, well, one can argue that this game is likely to continue for a while.
But does this mean that the U.S. bond market is in a bubble? It may be just one man's opinion, but I don't think so. You see, bond prices have continued to rise not out of a fervor by the investing public to own bonds, but rather "too many dollars chasing too few goods" (which in this case, would mean bonds). As such, I'll argue that this is really a case of supply and demand rather than an emotional period where bonds must be bought at all costs.
The REAL Potential Bubble Is Forming In...
With that said however, I do have a very bad feeling about what is happening in the European bond market. For example, yesterday, a number of Eurozone benchmark bond yields hit record lows. Yes, that's right, record lows. German 10-year yields fell 4 bps to a record low of 0.29%. Same thing happened in France, where the yield on the 10-year finished at 0.56%. And Dutch paper closed at 0.34%.
Let's keep going here. In Italy, the 10-year yield finished at 1.34%... Spain: 1.25%... Portugal: 1.95%... and the yield on the 10-year in Ireland closed at 0.87%.
By comparison, the yield on the U.S. 10-year note closed at 2.016%. Wait, what?
So, while it is hard to fathom, the 10-year yields on most of the "PIIGS" countries (save Greece, of course) are now significantly less than that of the good ol' USofA. The questions that leap to mind include: Aren't these the same countries that couldn't borrow in the open market a couple years ago? Weren't there trioka bailouts involved in some of these places? Hmmm...
The explanation here is two-pronged. On one hand, investors recognize that the ECB is about to fire up the printing press and so they want to "shake hands with Mr. Draghi" and buy what he will be buying.
But the real reason money has been flooding into the sovereign debt of European countries has to do with... wait for it... accounting.
During the crisis years in Europe, the fear was that the European banking system would collapse due to fact that the PIIGS would undoubtedly default on their debt. However, none have. And since the rule is that sovereign debt can be carried on bank balance sheet at par - at all times - there is no risk unless, of course, there is a default.
Think about that for a moment. If you are a banker in Europe and your establishment is on shaky ground. The best thing you can buy now that the Eurozone has pretty much guaranteed that there won't be defaults on sovereign debt is... sovereign debt. You can basically buy it and not have to worry about it changing in price. Done!
And now that the ECB has announced it will be in there buying up bonds... Therefore, I think you will agree that buying European soverein bonds is kind of a no-brainer right now.
So, is this the new bubble? Prices seem to be more than a little ridiculous. The demand is almost insatiable. And folks are lining up around the block to buy this stuff. Oh, and nobody is talking about this! Again, the appropriate response might be, Hmmm...
To be clear, I'm not declaring that a bubble is forming in the European bond market. But when the buying of an asset becomes artificial and central bankers around the globe are trying to manipulate prices, I'm just saying that some caution might be warranted!
Turning to This Morning...
Things are fairly quiet once again in the early going as there is little in the way of new inputs for traders to react to. Oil remains in focus as prices are back below $50. But futures are moving higher this morning. Greece is also still on the radar as Tsipras suddenly has problems with his own Parliament. Yields across the pond are continuing to attract some attention as the calendar approaches the launch date of the ECB's QE program. And here at home the recent Fedspeak has been pretty much in line with market expectations. On the data front, the first revision to Q4 GDP for the U.S. was revised lower, however, this was expected as most of the recent data has come in on the soft side. So, in response, futures are pointing to a slightly lower open once again on Wall Street.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -0.32%
Crude Oil Futures: +$1.08 to $49.25
Gold: -$0.50 at $1209.70
Dollar: lower against the euro, and pound, higher vs. yen
10-Year Bond Yield: Currently trading at 2.022%
Stock Indices in U.S. (relative to fair value):
S&P 500: -1.49
Dow Jones Industrial Average: -6
NASDAQ Composite: -3.32
Thought For The Day:
Always and never are two words you should always remember never to use. - Wendell Johnson
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Fed/ECB Policy
2. The State of the U.S. Economy
3. The State of the Oil Crash
4. The State of the Latest Greek Drama
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Positive
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 2 years)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Key Near-Term Support Zone(s) for S&P 500: 2085
- Key Near-Term Resistance Zone(s): 2120
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator (Short-Term): Positive
- Price Thrust Indicator: Positive
- Volume Thrust Indicator: Neutral
- Breadth Thrust Indicator: Positive
- Bull/Bear Volume Relationship: Positive
- Technical Health of 100 Industry Groups: Moderately Positive
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- S&P 500 Overbought/Oversold Conditions:
- Short-Term: Overbought
- Intermediate-Term: Neutral
- Market Sentiment: Our primary sentiment model is Negative .
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.
- Weekly Market Environment Model Reading: Positive
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research
Be Sure To Check Out the NEW Website!
Trend and Breadth Confirmation Indicator (Short-Term) Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.
Price Thrust Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.
Volume Thrust Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.
Breadth Thrust Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.
Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.
Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.
Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., a registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.
Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.
Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.