Richard Russell, author of The Dow Theory Letters, isn’t buying the new bull market talk (read why this isn’t a new bull market here). He’s now wondering if all this money printing hasn’t created a new bubble and whether “really bad times lie ahead”:
Question, has the Fed’s quantitative easing thrust the stock market into another bubble (a bubble that can now be bursting). Consider the following: Enthusiastic investors have pushed the S&P up 70% since last March. That’s a recovery of 52% of the 2008-09 losses.
Could this have been a stock market bubble? Consider the following: Eighty-five stocks in the S&P now have price/earnings ratios over 60, based on the last 12 month’s earnings. Some examples — Healthways (HWAY) P/E 277, Skechers USA (SKX) P/E 225, Bank of America (BAC) P/E 185, Perficient (PRFT) P/E 165, City National Bank (CYN) P/E 186, and so on.
Russell notes one of the most disturbing features of this rally – it has been on nearly non-existent volume. He also cites investing legend Joe Granville, who has nailed this market. Granville is turning bearish for the first time in several years and that has Russell very concerned:
My old buddy, Joey Granville, has been terrific on this market. Joe has ridden the market all the way up since March. Joe uses his on-balance-volume studies to set him right. Writes Joe in his latest fax, “All my technical indicators are based on VOLUME.” Now Joe has turned near-term bearish and is putting out shorts for the first time in two years.
I’m guided by volume too, I’ve been warning subscribers about this market because of the high number of “Distribution Days.” These are days when the market closes down on rising volume. Distribution days are indicative of institutional selling. Here is the latest count on distribution days — 6 for the Dow and the S&P 500; 5 for the NYSE; 3 for the Nasdaq, all occurring over the last two weeks. That’s far too many, the implication being that institutions have been selling this market under the guise of a rising Dow.
In terms of the technicals, there isn’t much to like here either. The Dow Industrials and the Dow Transports have both broken their 50 day moving averages:
The sinking market is taking a lot of late-arrivals along with it; These are the poor souls who bought stocks hoping to recoup some of the losses they suffered during 2008-09. The falling stock market, I believe, will turn consumers even more sceptical and bearish than they have been. Today, by the way, the Dow and the Transports both closed below their 50 day moving average, this for the first time since last November.
Russell has lived through many bull and bear markets and he’s still not convinced this is the making of a new bull:
Despite it all, I continue to believe that since March we have been in a bear market correction, and not a new bull market. For this reason, I take the current rotten market action very seriously. If I’m correct, it this is the beginning or a top-out in a bear market rally, then I can tell you that the “fun’s over,” and the really bad times lie ahead.
What I’m now trying to decide is whether this is just a short-term correction or whether we are seeing a serious top-out of the rise from the March lows. A bearish turn of events would be an initial decline, then a weak rally and a second decline violating the lows of the first decline. In other words, a definitive downward pointing zig-zag.
The Dow has now wiped out all of its 2010 gains and now shows a loss for the year, but more about the meaning of this tomorrow. Subscribers who wondered why I didn’t want to put the bull in the box may now see my hesitation. Bear market rallies turn on a dime, and in a few sessions you can be under water. I want my subscribers to be in the best shape possible if or when this market “has had it.” A few more weeks like this one, and we could see a real old-fashioned panic.
The VIX is 22, which tells us that nobody has been buying puts. Confidence and complacency are the mood of the day. Nobody’s ready for a lousy market ahead.
That’s about all I have to spout about today. Golly, tomorrow it’s Friday. Time flies when you’re having fun. After six months of sun, now we’re having a flood. Noah, start building another ark.
God save America,
Great, great thoughts….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.