CLASSIC TOPPING PROCESS TURNING INTO CLASSIC MARKET TOP
While so many are already saying that what we are seeing is just one of those normal corrections and that the recent drop came out of nowhere, you know that from what we have been telling you for months and more strongly in the past few weeks, that we very much disagree. Simply put, we have been telling you the market was in a classic topping process and now it looks to now be turning into a classic market top.
As we have told you, tops do not happen in a flash. They happen over time as the “termites” chip away. Tops are a process of a narrowing down of the market as money flows from the average stock and parks in the biggest names that have so much influence on the popular indices. While the popular indices hold up, termites continue to eat away at the market. This has been seen in the horrid action of the small caps and mid caps versus the big names that are in the Dow, S&P and the NDX. In fact, when the Dow and S&P were just a day off recent highs, there were 50 new highs and 250 new lows. When the Dow and S&P were at new highs, only about 40% of all stocks were in good technical position. This is the market screaming that underneath the surface, trouble lies ahead. And now, to make matters worse, after this past nauseating week, only about 25% of stocks are in good technical shape…and that’s being nice. Of those, it is mostly defensive names in areas like Utilities, food, drugs, beverages and household products. Adding a little more fuel to the fire, all major indices are either down to or have broken the long term 200 day moving average…with the small, mid and NYSE all way below that important area of support. But we are not done. Foreign markets are being crushed. This goes hand in hand with market tops of importance.
And of course, this past week’s action speaks for itself. All asset classes were whacked with the Sox down 9% and the Transports at a 7% drop. Frankly, there is not much we can find to like about this market except the very oversold condition which will eventually lead to a good bounce. But before we get to the short term, here is the rest of the evidence that showed up in recent months:
MASSIVE AMOUNTS OF MARGIN. Margin is your best friend in bull markets but worst enemy in bearish phases. Margin went to all-time highs in the past month.
A TON OF SECONDARIES AND IPOS. Not only does this add supply to the market but more importantly, just another characteristic that shows up in the late stages of bull phases. One can also add in how far the bar has dropped on the IPOS as most IPOS in recent months lose money and a few had no sales. We repeat: NO SALES. The fabulous investment banks foisted upon a greedy and unwary public a bunch of no sales Biotechs. 1999 anyone? Lastly on this front, Alibaba with a measly $230 billion market cap with only $8 billion in sales. Are you kidding?
EXCESSIVE FROTH AND SPECULATION. When you see biotechs with no sales have multi-billion dollar market caps…that’s froth. When you see 10 cent stocks go to $3…that’s froth. When you see a biotech with no sales announce a good trial and triples overnight…that’s froth.
BULLISH READINGS AT MULTI-YEAR HIGHS AND LOW BEARISH READINGS NOT SEEN SINCE 1987. We’ll let this one speak for itself.
MERGERS,BUYOUTS AND MORE MERGERS AND BUYOUTS. To be blunt, mergers and buyouts do not happen at lows. We also need to add in the insane valuations of private equity deals, some with $10 billion market caps with no sales. Again, 1999!
This leads us to the here and now. We have several thoughts on several fronts.
We would love to give thoughts on the short term but it is the least important and too random. Just look at last week’s wild action. Whether or not the market bounces from here or after further downside, we would rather you pay more attention to the big picture…and that markets across the globe are in trouble.
OUR BIGGEST WORRY REMAINS THE ONE-SIDED TRADE COMBINED WITH ALL THE MARGIN. This could lead to a market “event!” We do not predict such things but recognize the conditions being out there. This leads us to our final thoughts on the Fed. If the market does crack wide open, WE EXPECT THE FED TO ANNOUNCE QE4. Yes…Janet Yellen will turn right around and rifle up the printing presses as Bernanke’s and Yellen’s main goal is to keep asset prices moving higher. While we think that would cause a strong short-covering rally, we doubt it will change the top that is being put in place, but granted, you never know as the amount printed has been unfathomable.