A sustained increase in stock prices over a period of time greater than one week is a stock market rally. Market rallies can last months or even years. There are up days and down days, but overall, the market moves higher over a period of time. The late 1990s saw one of the longest stock market rallies in history.
So the S&P 500 has touched the 2,000 mark.
Will the S&P 500 continue to march to new highs?
Well, my opinion towards the stock market hasn’t changed. I remain skeptical for a variety of reasons, many of which I have shared with my readers over the past few months.
But I have a new concern about the stock market, something that hasn’t been touched on by analysts: trading volume is collapsing.
Please look at the table below. It shows the performance of the S&P 500 and its change in trading volume.
|Year||Performance||Change in Volume|
*Until August 25, 2014
Data source: StockCharts.com, last accessed August 25, 2014
Key stock indices like the S&P 500 (it is the same story for the Dow Jones) are rising as volumes are declining, suggesting buyers’ participation in the stock market advance is very low. For a healthy stock market rally, any technical analyst will tell you that you need rising volume, not declining volume.
It’s Economics 101: rising demand pushes prices higher. In the case of the S&P 500, we have declining demand (low trading volume) and rising prices. Something doesn’t make sense here.
Looking at the economic data, it further suggests key stock indices are stretched. We continue to see the factors that are supposed to drive the U.S. economy to deteriorate.
Just look at the housing market. The number of new homes sold continues to decline. In January, the annual rate of new-home sales in the U.S. was 457,000 units. By July, it was down more than 10% … Read More
If you follow the financial news, it feels like the stock market is moving higher and higher…a situation in which investors often feel they are missing out.
But the reality of the situation is very different. So far this year, almost eight full months in, the Dow Jones Industrial Average is up only three percent.
Would you buy stocks with the Dow Jones trading at 17,100, near a record-high price-to-earnings (P/E) multiple and a record-low dividend yield? I wouldn’t. Hence, the question changes from “Am I missing out?” to “Is it worth the risk?”
On Monday, the chief market strategist at BMO Capital Markets said, “Longer term we are in the camp that believes U.S. equities are the place to be. They are the most stable asset in the world.” (Source: “Bull market will charge higher for 15 more years says strategist,” Yahoo! Finance, August 18, 2014.)
The belief that “stocks are the place to be” has gone mainstream now. And that’s very dangerous.
The reality of the situation: (1) stocks are trading at very high historical levels when measured by the P/E multiple and dividend yield; (2) the Fed is stopping its money printing program; (3) investors are pulling money out of the stock market; (4) consumer spending is tumbling; (5) stock advisors have remained too bullish for too long; and (6) the chances of a 20% stock market correction are very high.
According to the Investment Company Institute (ICI), between April and June, mutual funds that invest in U.S. stock markets witnessed net withdrawals of $19.1 billion. While July’s monthly figures are not updated just yet, looking at … Read More
Not too long ago, I reported that Italy, the third-biggest economy in the eurozone, had fallen back into recession.
Now Germany’s economy is pulling back. In the second quarter of 2014, the largest economy in the eurozone witnessed a decline in its gross domestic product (GDP)—the first decline in Germany’s GDP since the first quarter of 2013. (Source: Destatis, August 14, 2014.)
And more difficult times could lie ahead…
In August, the ZEW Indicator of Economic Sentiment, a survey that asks analysts and investors where the German economy will go, posted a massive decline. The index collapsed 18.5 points to sit at 8.6 points. This indicator has been declining for eight consecutive months and now sits at its lowest level since December of 2012. (Source: ZEW, August 12, 2014.)
Not only does the ZEW indicator provide an idea about the business cycle in Germany, it also gives us an idea of where the eurozone will go, since Germany is the biggest economic hub in the region.
But there’s more…
France, the second-biggest economy in the eurozone, is also in a precarious position—and a recession may not be too far away for France.
After seeing its GDP grow by only 0.4% in 2013, France’s GDP came in at zero for the first two quarters of 2014. (Source: France’s National Institute of Statistics and Economic Studies, August 14, 2014.)
France’s problems don’t end there. This major eurozone country is experiencing rampant unemployment, which has remained elevated for a very long time.
While I understand North Americans may not be interested in knowing much about the economic slowdown in the eurozone, we … Read More
Let’s start with the U.S. housing market. Has the recovery for it ended or just stalled?
My answer comes in one sentence: While it’s always a matter of location, only the high-end housing market is doing well, while the general market is weak.
I can see it in the mortgage numbers. People just aren’t taking loans to buy homes in the U.S. economy. In fact, mortgage applications are tumbling.
In the second quarter of 2014, Bank of America Corporation (NYSE/BAC) funded $13.7 billion in residential home loans and home equity loans—down 49% from a year earlier, when it funded $26.8 billion in similar loans. (Source: Bank of America Corporation, July 16, 2014.)
JPMorgan Chase & Co (NYSE/JPM) originated $16.8 billion in mortgages in the second quarter (ended June 30, 2014)—down 66% from a year ago. (Source: JPMorgan Chase & Co., July 15, 2014.)
And Wells Fargo & Company (NYSE/WFC) also reported a massive decline in mortgage originations. In the second quarter of 2014, it originated $47.0 billion in new mortgages—down 62% from the second quarter of 2013. (Source: Wells Fargo & Company, July 11, 2014.)
So even though interest rates continue at a record low, people are not borrowing to buy homes in the U.S. economy.
But it’s not just the housing market that is weak. The entire U.S. economy is soft…masked by an artificial stock market rally and skewed “official” government statistics that don’t give us a true picture of the unemployment situation or inflation.
We’ve all heard by now that Microsoft Corporation (NASDAQ/MSFT) is planning job cuts of almost 18,000. (Source: USA Today, July 15, 2014.) … Read More
There are two important charts I want my readers to see this morning.
The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.
The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).
Chart courtesy of www.StockCharts.com
What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.
Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)
Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)
France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, 2014.)
In 2014, the Chinese economy will grow at its slowest pace in years. In Japan, the Bank of Japan (its equivalent to our Federal Reserve) has announced it will start buying exchange-traded funds (in specific, the Nikkei 400 ETF) to “boost the impact of (its) unprecedented easing.” (Source: “Bank of Japan Seen Buying Nikkei 400 ETF,” Financial Post, July 10, 2014.) Yes, the central bank of Japan is buying … Read More
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