By Brian Maher
This post Happy Days Are Here Again appeared first on Daily Reckoning.
The lion has rediscovered its roar…
The S&P notched a new intraday high yesterday — 2,873.23 — eclipsing its January peak of 2,872.87.
Strong corporate earnings and a bouncing economy are the explanations widely on tap.
The professional men sang hosannas… and clapped happy hands.
Yesterday’s record is “fundamentally justified by the strong economy and better earnings,” says Kevin Caron of Washington Crossing Advisors.
“From an economic standpoint… it looks like we’re still in pretty solid shape,” adds Andrew Hopkins, head of equity research at Wilmington Trust.
The bears “may be waiting in vain” according to Steve Auth, chief investment officer at Federated Investors.
Stocks are “running out of excuses for not going up,” says this bull.
Just so.
Apparently escalating trade war and a possible emerging-market crisis (Turkey) are not menaces that rate a mention.
Where do stocks go next?
Perhaps we should consult the historical record for guidance…
Recall the S&P registered its last record high in distant January.
According to Bloomberg, the S&P has sustained 17 similar record-less spans since 1927.
What follows after a new record is established, as yesterday?
More records is the answer.
Bloomberg’s research reveals stocks rose the next 12 months on 16 of 17 occasions — a nearly blemish-free record.
On average, the S&P rose 13% over such periods.
In light of the foregoing… you can expect clear conditions to the far horizon.
And no one buys the umbrella when the sun is bright.
But as we have noted before, climate is what a fellow can expect — weather is what he actually gets.
The Sahara sees its days of rain… snow occasionally falls on Florida… Baltimore weather is not always paradisiacal.
Meantime…
A reliable market barometer — with over 100 years of history in back of it — has just given only its sixth “sell” reading since 1895.
That is, unlike many market “indicators”… this one doesn’t cry wolf.
Here we speak of the Sound Advice Risk Indicator.
Hatched by analyst Gray Cardiff, this indicator compares the ratio of the S&P to the median price of a new home.
When the S&P jumps too far ahead of home prices… look out.
Financial analyst and journalist Mark Hulbert:
The investment rationale underlying this indicator, according to Cardiff, is that it “measures the struggle for capital” between the two major asset classes that compete for capital at the riskier end of the spectrum — stocks and real estate. When the indicator rises above 2.0, he argues, it means that the stock market has absorbed “a larger proportion of available investment capital than economic conditions can justify” and, therefore, it is in “imminent danger of falling.”
As the following chart reveals, the Sound Advice Risk Indicator now exceeds 2.0:
Does this mean stocks are in “imminent danger of falling”?
No.
As Cardiff admits readily, his indicator is not necessarily an immediate fire alarm.
After cresting 2.0, he acknowledges stocks can rise “for many months, sometimes even a couple of years.”
Its last sell signal came in 1998, for example — two years before the 2000 crash.
But — but — “in all cases, a major decline or crash followed, pulling down stock prices by 50% or more.”
“In all cases” is not a record to be sniffed at.
Did it botch the 2008 market collapse?
It did — the indicator never breached 2.0.
But it also gave a strong buy signal in early 2009, when the risk indicator struck a low of 0.77.
If you had entered the market with gusto at that point… you would likely be in easy waters today.
Now above 2.0, it advises to sell.
But if the market could still peg along “for a couple of years,” are you better informed today than yesterday?
We have argued previously the bull could steam another year or two before the great reckoning.
Why?
We still await the “melt-up” that takes stocks to incandescent extremes… before the flaming out.
Investors in the mass have yet to strike the match.
For the past month, investors have only sunk $15 billion into ETFs centered on U.S. stocks.
During the bullish month of January… that figure totaled $40 billion.
“I would be more concerned if there weren’t worries in the market,” confirms Malcolm Polley, president of Stewart Capital Advisors.
“That would mean you get a euphoric blow-off.”
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria,” said Sir John Templeton.
If true, the terminal phase, the denouement, is yet to come…
Regards,
Brian Maher
Managing editor, The Daily Reckoning
The post Happy Days Are Here Again appeared first on Daily Reckoning.
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