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Be prepared for prices and sentiment to roll over
The latest technical and sentiment indicators show a mixed picture of the U.S. stock market. Although the technical indicators are bullish, the sentiment indicators are overbought:
Please notice there are strange things happening to the stock market as well, with the U.S. market at all-time highs. Consider:
1. The price/earnings ratio (p/e) of the Russell 2000 RUT, +0.89% is approximately 237. For perspective, the Nasdaq Composite COMP, +0.49% had just reached 5,000 on March 9, 2000, and its p/e was at 175. At that time, one well-known analyst famously said that “P/E’s don’t matter anymore.” Days after the Nasdaq hit 5,000, the market began to plunge…until it had fallen by 75%.
2. The cyclically adjusted p/e (CAPE), a measure created by economist Robert Shiller, “now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania, and the 2007 housing and stock bubble,” says Alan Newman in his Stock Market Crosscurrent letter (source: CNBC).
3. Investor sentiment is going from one extreme to the other. As bullish investors cheer for Dow 20,000, don’t forget that in 2012, the crowd chanted for gold GLD, -0.74% to go to $5,000 an ounce when it was near $2,000. Now gold GCG7, +0.23% is near $1,100 an ounce, and few are cheering. In 2014, the crowd chanted for oil CLF7, +0.19% to go to $150 a barrel when it was at $110. After the oil bubble burst, oil is sitting near $50 a barrel.
4. Sentiment indicators such as the RSI, and sentiment surveys including the AAII (American Association of Individual Investors) and Investors Intelligence reflect the belief that stocks are not going down, and if they do, will bounce right back. Few investors are expecting a pullback, or even a correction, especially as the year comes to a close. These beliefs always happens when the market is near extremes, and just like in 1999, most believe the market will keep going up. The only fear from investors is the fear of missing the next rally.
The latest technical and sentiment indicators show a mixed picture of the U.S. stock market. Although the technical indicators are bullish, the sentiment indicators are overbought:
Please notice there are strange things happening to the stock market as well, with the U.S. market at all-time highs. Consider:
1. The price/earnings ratio (p/e) of the Russell 2000 RUT, +0.89% is approximately 237. For perspective, the Nasdaq Composite COMP, +0.49% had just reached 5,000 on March 9, 2000, and its p/e was at 175. At that time, one well-known analyst famously said that “P/E’s don’t matter anymore.” Days after the Nasdaq hit 5,000, the market began to plunge…until it had fallen by 75%.
2. The cyclically adjusted p/e (CAPE), a measure created by economist Robert Shiller, “now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania, and the 2007 housing and stock bubble,” says Alan Newman in his Stock Market Crosscurrent letter (source: CNBC).
3. Investor sentiment is going from one extreme to the other. As bullish investors cheer for Dow 20,000, don’t forget that in 2012, the crowd chanted for gold GLD, -0.74% to go to $5,000 an ounce when it was near $2,000. Now gold GCG7, +0.23% is near $1,100 an ounce, and few are cheering. In 2014, the crowd chanted for oil CLF7, +0.19% to go to $150 a barrel when it was at $110. After the oil bubble burst, oil is sitting near $50 a barrel.
4. Sentiment indicators such as the RSI, and sentiment surveys including the AAII (American Association of Individual Investors) and Investors Intelligence reflect the belief that stocks are not going down, and if they do, will bounce right back. Few investors are expecting a pullback, or even a correction, especially as the year comes to a close. These beliefs always happens when the market is near extremes, and just like in 1999, most believe the market will keep going up. The only fear from investors is the fear of missing the next rally.