Stealth Stocks: Market Caution

12/10/2015 9:00 am EST

Focus: STOCKS

Dennis Slothower

Chairman and CIO, Alpine Capital Management

My indicators continue to point to a major topping process developing in the stock market. The handwriting is on the wall, cautions Dennis Slothower, editor of Stealth Stocks.

The underlying trends in both the domestic and the global economies continue to worsen. In November, Japan reported it fell back into recession for the fifth time in seven years, unable to gain growth no matter how much it undercuts its currency through QE.

Money managers are losing faith in China’s ability to revive its economy, which suffers from rising nonperforming loans and falling exports, after the surprise 1.9% currency devaluation in August and the global market rout that followed.

I expect to see another devaluation of China’s currency soon as it heads toward a hard landing. The EuroZone crisis has transitioned from an acute phase to a chronic one. Public debt loads are now bigger than in 2010, not smaller after all the money printing.

Given the global slowdown and plunge in oil and commodity prices, is it any wonder that business sales are down? Inventories have soared. For the seventh month in a row, durable goods fell year-over-year. This has never occurred without a recession.

Manufacturing continues to contract. Housing is turning weak. Exports are down 7%. This adds up to a negative outlook and certainly does not support higher S&P 500 prices.

This past year has been a very challenging one because it has lacked a trend, either positive or negative. In 2015 the stock market churned, whipsawing from one situation into another but not really getting anywhere.

Corporate earnings growth has been very disappointing this year. Third-quarter earnings for the S&P 500 were negative for the second quarter in a row. The last time earnings were this substandard was in 2008.

It is the negative trend in corporate earnings that is worrisome. As long as earnings and revenues continue to contract, the major indexes become ever more distorted as we prepare to go into 2016.

Currently the S&P 500 earnings are $94.59 a share; a year ago they were $105.87—a drop of 10.6%.

This is a very disturbing trend and hardly justifies higher stock prices that are sustainable, much less a climb to all-time highs.

According to Goldman Sachs (GS), technology stocks accounted for 50% of the overall S&P 500 expansion during the past five years. Apple (AAPL) alone makes up an astonishing 20% of that rise. That’s how narrow this bull market has been.

Meanwhile, the NYSE, Russell 2000, and Wilshire 5000—which are much broader indexes—are lagging woefully behind and remain below their bullish benchmarks and still in bearish territory.

This bearish divergence is a sign of an unhealthy market, because there isn’t broad-based buying support. Stock rallies have become very narrow...with only a few stocks moving higher.

When markets are this narrow, they can fall very quickly due to grossly overvalued stocks.

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