Timing the Peak of a Mania Is a Risky Proposition
01/12/2018 9:48 am EST
Stocks are about as stretched as we can possibly imagine. This will not prevent an even more overbought condition and we would remind that timing the peak of a mania is a distinctly risky proposition. writes Alan M. Newman, editor of www.cross-currents.net.
Michael Kahn's Getting Technical feature in Barron's Jan. 10 mentioned our reportage on total margin debt as one of several important concerns of a market apparently grossly "overbought" and fraught with risk.
Seeing the Dow Jones Industrial Average (DJIA) up yet another 150 points this week is a shock. Valuations have been this stretched only one time before in all of stock market history.
Again, we refer to Shiller’s Cyclically Adjusted P/E ratio (CAPE) which now stands at more than double both CAPE's mean and median. A 50% decline in stock prices would now be required to get CAPE back to the historic average. To those who might speculate the permanence of these lofty gains, we would hasten to remind that CAPE revisited the mean and median less than nine years ago.
The sentiment of newsletter writers is similarly extended. A one-year moving average of bulls divided by bears is more than three standard deviations away from the norm for seven weeks, a situation seen about 0.27% of the time. The last time this occurred was in 2015 and stocks then corrected over 15%.
Stocks are about as stretched as we can possibly imagine. This will not prevent an even more overbought condition and we would remind that timing the peak of a mania is a distinctly risky proposition. We are compelled to repeat: stocks are about as stretched as we can possibly imagine.
Also of import, for the first time in the nine-year bull market, the S&P 500 dividend yield is no longer above that of 2-year Treasuries. Two-year Treasuries yield now more than the S&P 500 Index (SPX). This could be the straw that breaks the bull's back.
On our hourly charts, SPX 2736 and Dow 25,256 are now key support levels.