Stock advisors have been telling their clients that the key stock indices are going higher and the stock market rally is here to stay. But for this market analyst, as the key stock indices make new highs, my skepticism increases. Here’s why:
Many stock advisors are calling for a break by the key stock indices above their 2007 highs. Take the S&P 500, for example; the index is inching closer to the 1,575 level—its all-time high. Unfortunately, as the index moves higher, volume has been declining. Just look at the chart below. The last time the S&P 500 reached its top, it was actually on increasing volume. (Note: volume is at the bottom of the chart.)
Chart courtesy of www.StockCharts.com
But this is not all. In addition to low participation, as the key stock indices rise, corporate insiders have become big net sellers of stock. According to the Vickers Weekly Insider Report, for the week ended February 1, 2013, corporate insiders of companies listed on the New York Stock Exchange (NYSE) sold 9.20 shares for every one share they bought. In December 2012, they were selling 8.39 shares for every one share they bought. (Source: Market Watch, February 6, 2013.) The activity of corporate insiders, many of whom have their companies included in key stock indices, shouldn’t be taken lightly.
Next, the number of stock advisors turning bullish on key stock indices in favor of a stock market rally is near a 12-month high. According to Investors Intelligence, there are more stock advisors turning bullish now than at any other time since mid-February 2012. (Source: Investors Intelligence, February 6, 2013.) This is a contrarian indicator; the more bullish stock advisors are on key stock indices, the more likely the stock market will go the other way.
And we have the National Association of Active Investment Managers’ survey telling us that in the last week of January, equity exposure by funds reached a multi-year high. The survey posted a reading of 104.25—a reading above 100 suggests funds are fully invested in equities. (Source: National Association of Active Managers web site, last accessed February 11, 2013.) This tells us that mutual funds are fully invested. A stock market cannot continue to rise if funds are not putting more money into the market. And historically, whenever mutual funds have been fully invested like they are today, key stock indices have gone down.
Finally, margin debt—the amount of money borrowed to buy securities on the NYSE—is near a five-year high. This means that investors are taking on more leverage. Margin debt on the NYSE has been increasing since July 2012. It stood at $330 billion at the end of December 2012. Last time it reached this high, it was in February 2008. (Source: New York Stock Exchange web site, last accessed February 11, 2013.)
If we move away from the technicals and fundamentals of the stock market and look at the economy, the situation isn’t any better. The U.S. economy experienced a contraction in gross domestic product (GDP) in the fourth quarter of 2012 for the first time in three-and-a-half-years. One more quarter of negative GDP takes the U.S. into an official recession—imagine how fast consumer spending will come to halt then as consumer confidence plunges!
Dear reader, stock market rallies usually end as optimism peaks. This is what I believe we are currently witnessing. I believe we are near a top for the stock market. Do the key stock indices have enough steam left for one big, final blow-off? Sure they do. But the sustainability of the rally just isn’t there—the key stock indices are getting very close to a top.