Many analysts feel we're witnessing a bubble formation, like that which formed, and burst, in 2000, but MoneyShow’s Tom Aspray shares why he feels it's too early to make that call, given the differences between the two markets.
The long awaited Twitter IPO did better than expected, as it closed Thursday 70.8% above the initial offering price. The S&P futures had turned lower by the opening, and closed very weak. It appeared that someone was paying attention to the financial networks and their segments on whether it was a “stock market bubble.”
This discussion may have been in reaction to comments on October 29, by BlackRock’s Chief Executive Officer Laurence D. Fink, who said “Fed policy is contributing to bubble-like markets, such as the surge in stock prices.” BlackRock manages a reported $4.1 trillion in assets, which makes it the world’s largest money manager.
Two other long-term bulls, Edward Yardeni and Laszlo Birinyi, according to the New York Times, are concerned that the current complacency would lead to a “melt-up” in stock prices. They both think a correction of 10%, or so, would be healthy, as it should set the stage for even higher prices. Edward Yardeni has an S&P target of 2014 for next year.
In my opinion, the last real bubble in the stock market was the dot.com boom that topped in March 2000, when the Nasdaq Composite topped at 5132. It closed Thursday at 3857 and is still 33% below the 2000 high.
The chart above compares the March 10, 1999 to March 10, 2000 period with the past 12 months. It is easy to see that the angle of ascent in 1999-2000 was dramatically steeper than it is now. This is not a bubble.
Clearly, the market is overbought on a near-term basis, as 447 of the S&P 500 are higher for the year. The number of S&P 500 stocks above their 50-day MAs has dropped from just over 80 and is back to the mean of 67. It is not yet oversold, as it bottomed at 35 in October.
One common concern amongst the bears and bubble cap, is the fact that the spread between Investors Intelligence bulls and bears has jumped to 39%. The Option Strategist’s Larry McMillan points out that this is a “huge number.”
As most know, this a contrary indicator, as when too many are bullish, there is theoretically no one left to buy. Conversely, when bearish sentiment is too high, everyone has sold and no one wants to buy. The chart from Investors Business Daily shows that the last higher reading of 41.4 was reached on April 8, 2011.
In April 2011, the S&P corrected 3.3% from the highs, and then rallied 5.8% from the lows to make a new high on May 2. The S&P 500 declined 21.5% over the next ten months, as it bottomed in early October.
Using the ineffective 20% measure, stocks were in a bear market which turned the sentiment even more bearish. At the market low, the spread had reversed, as there were 10% more bears than bulls, and the daily advance/decline lines indicated a market low was in place.
On the economic front, there were several surprises last week. Most expected that the ECB would leave rates unchanged, but instead, they lowered rates by 0.25%. This was in reaction to the low rate of inflation, which is well below their target zone of 2%. The chart below of Spain’s inflation rate illustrates their problem. It was over 4% in 2008 and is now at 0.3%.
Interest rates in the Euro zone are still higher than those in the US, so it is not clear that this action will weaken the Euro enough to stimulate their economy, but that is the hope.
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