Is Today’s Stock Market Overbought?
Today’s ETF market reminds me of the classic children’s story, “The Little Engine That Could” and its unforgettable refrain, “I think I can, I think I can” as the little engine struggled up the hill against seemingly insurmountable obstacles.
On low volume and in the face of revolution abroad and at home, gathering inflationary storm clouds and weakness in Europe, “the little market that could” keeps climbing and passing significant milestones along the way.
On My Radar
Chart courtesy of StockCharts.com
Looking at the “big picture” of “the little engine that could,” we see a chart that seems to be “forever overbought,” as demonstrated by RSI in the top of the graph and Stochastic at the bottom.
Plus the S&P (NYSE:SPY) cleared the psychologically significant level of 1332 which is roughly a 100% gain off the lows of March, 2009, so that has been quite a rapid recovery, indeed.
Now “dips” are little more than momentary burps as markets have become convinced that any “correction” will be quickly be repaired by the easy money of the Fed and the world has absolutely become addicted to the flow of liquidity that has been coursing around the world for lo these many months.
Of course, as the old saying goes, “nothing lasts forever,” but for now we will climb the mountain with the little engine, even though the ride down the other side promises to be terrifying indeed for those who fail to get off at or near the summit. But the downside will offer equal opportunity by virtue of our ability to “short” the market using inverse ETFs.
The View From 35,000 Feet
This week seemed to be all about riots, both at home and abroad.
In the Middle East, unrest has spread to Libya, Algeria, Yemen, and Bahrain and increasingly, it looks like Saudi Arabia could be next up.
At home, mass demonstrations in Wisconsin were our own version of civil unrest as the unions square off against the Governor and the Democratic State Senators left the state to prevent their Senate from being able to form a quorum to consider the proposals for benefit cuts and spending reform.
Meanwhile, the U.S. House of Representatives set up a showdown of a different sort as they put forth $61 Billion of spending cuts and the high stakes game of chicken between Republicans and Democrats escalates as the Federal funding deadline of March 4th approaches.
Fed Chairman Ben Bernanke was in France busily defending his quantitative easing policies while 19 large U.S. banks were told to undergo stress tests assuming another recession with 11% unemployment. (Many analysts would argue that we’re already in that situation or worse)
And overseas, Portugal seems rapidly heading for a bailout as the yields on their 10 Year Bonds hit a record high of 7.5% amid signs of a re-emerging liquidity crunch in Europe. China (NYSE:FXI) raised its bank reserve requirements by another 50 basis points in an ongoing, so far relatively ineffective, effort to combat inflation that seems to be spreading around the world at an accelerating pace, with world food prices increasing 29% year over year and forcing more than 40 million people into poverty.
On the sentiment front, bullish sentiment as reported by Investor’s Intelligence and American Association of Individual Investors remains at extremes, along with a recent report from Merrill Lynch (NYSE:BAC) that shows fund managers bullishness at record highs while the National Association of Active Investment Managers NAAIM Survey of Manager Sentiment, (the NAAIM Number) is 83.73% compared to last quarter’s average of 66.99%. (http://naaim.org/naaimadsenttrend.aspx)
Economic reports were mixed last week with unemployment stubbornly rising, retail sales weaker than expected, industrial production and leading indicators all showing declines. However, on the positive side of things, housing starts were up, the Empire Manufacturing Index showed improvement as did the Philadelphia Fed report on economic activity.
Finally, the FOMC released the minutes of their meeting in which they expressed disappointment at the weak labor market, were happy with the strong stock market and, although they see increasing upside risks to inflation, are sticking to their program of quantitative easing which will buy bonds everyday next week to the tune of $17-25 billion.
What It All Means
So we continue to live in dangerous times around the world with potential threats to the global oil (NYSE:USO) supply and stability in the Middle East, growing inflation and systemic threats in Europe, and our own budgetary problems and looming battles at home.
Economic reports remain mixed; however, corporate profits continue to shine as earning season continues during the holiday shortened week ahead.
The “Bernanke Put” remains in play as we have been discussing for the past several weeks, and so the bulls are likely to remain in control until we get the bill, whenever that may be.
The Week Ahead
We get lots of economic reports this week in the housing sector while earnings reports will come hot and heavy in the retail sector. Major names reporting this week are Target (NYSE:TGT), Gap (NYSE:GPS), JC Penny (NYSE:JCP), Home Depot (NYSE:HD), Office Depot (NYSE:ODP), Walmart (NYSE:WMT), Hewlett Packard (NYSE:HPQ), Dollar Stores (NYSE:FDO) and Limited (NYSE:LTD) which should give some insight into the state of the all important consumer.
Friday brings the 4th Qtr GDP revision which will be closely sliced and diced to see how fast the U.S. economy might really be growing.
Tuesday: December Case/Shiller Housing Index, February Consumer Confidencee
Wednesday: MBA Mortgage Index, January Existing Home Sales
Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, January New Home Sales
Friday: 2nd Quarter GDP, Final February Michigan Sentiment Index
Disclosure: No positions in ETFs or stocks discussed in this article.
John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.
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