"The Bottom is Not in Place"

04/23/2020 5:00 am EST

Focus: CONSUMER

Alan Newman

Founder, Crosscurrents Publications, LLC

The recent rebound was obviously well intentioned but is ill advised; this is definitely not the stuff that bull markets are made of, cautions market timing specialist Alan Newman, editor of CrossCurrents.

We believe that stocks still face significant risk. At this moment, Shiller’s Cyclically Adjusted P/E (CAPE) is near 26, historically way, way overvalued at a time when earnings for almost all American companies will certainly crater.

The mean for CAPE is 16.70 and the median is 15.77, which equates to the major indexes down another 35%-39% from now. At the 2009 bottom, CAPE fell as low as 15, which would be down 40% from here.

We see a journey to the mean as an absolute certainty. We are convinced it will eventually occur before a new bull market can commence.

One reason is that we still see a dogged commitment of professionals to carry risk, despite the possibility of another significant downside wave. Risk exposures still in place today remain excessive.

The key Nasdaq Climax Indicator, which measures instances of 1-to-9 up-to-down daily volume is climax indicator is disturbingly quiet. There has been only one day that fits our definition of climax and history has shown that many such cases are required to signal the possibility that a major bottom is in place.

While we attribute a portion of the “quiet” to the vagueries of algorithmic trading, there is virtually no evidence to suggest a panic bottom of any kind.

Major bottoms are typically composed of many instances of dramatic moves in price and what we see to date is minimal compared to the past. We believe we have compiled the strongest possible case for caution in these pages today.

The Investors Intelligence tally of investment advisors does not in any way, shape or form indicate a bottom of any significance. There would seem to be plenty of room for sentiment to reach extremes that would indicate a major reversal at hand.

Ex-dividends, stocks have averaged a bit over 5% annualized for more than a century. While prices can meander above for long periods, there is a logical expectation for prices to eventually return to our line and as history has shown, even trade below for long periods. The regression line is currently Dow 17,021. A decline to this price level represents an entirely normal expectation.

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