Transcendental Market Truths:
The Market:
The stock market was relatively weak Monday as it consolidated its recent gains and prepares to move higher into early March.
Now, if that sounds like I'm bullish, I'm definitely not bullish. This market is as overvalued today as it was at the 2007 top - and probably more so. The long term trend is down and anyone who buys and holds at today's prices will probably not break even this decade.
This is a market just like 1982, except upside down. In 1982, stocks were very cheap. Most had very little debt and were selling at PE Ratios below 7. Prices were under book value. It was the beginning of a long secular bull market in stocks and no one wanted to own stocks for the short term, much less the long term. You could throw darts at the stock pages and make huge profits from those purchases in 1982. Today, the exact opposite is true. Stocks are priced for perfection, with PE Ratios running at twice normal levels. Everybody wants to buy dips and hold for the inevitable bull run that always follows bear markets. Except, bull runs do not start with PE Ratios this high.
Furthermore, stock indices have far more risk than potential reward from here. The strongest broad market index in the stock market, the MidCaps, is sitting at the top of the right shoulder of a massive Head and Shoulders top (that pattern projects a target below zero, which is, obviously, impossible, but that's how large the topping pattern is). It won't be a big surprise to me if most stocks go to zero over the next few years. Whether they get to zero via deflation or otherwise isn't clear, but given the incompetence of US leadership, there can be no assurance of "muddling through".
My current long term position is long the US Dollar, short the Euro Currency for a bull market move into 2014. For stocks, I prefer (these days) to keep trades short and driven mostly by technical systems and money flow.
Sentiment:
The bulls are completely sanguine in their faith in the future uptrend. Of course, the path in the market during the last 68 years has been up, but things are different this time. The people in charge in Washington are not capable of understanding why the financial markets imploded in 2008, much less what to do to fix them. Given the lack of any real insight, it's very difficult to see them successfully leading the market out the other side. Much unwinding of debt will have to be done before the markets can resume a bullish trend....
On the bright side, secular bear markets provide tremendous opportunities for huge profits over a relatively short period of time from the long and short side. It is just very important to scale in gradually and buy/sell extremes. |
