More to Come?

I saw this ad for the Potomac Funds today so I’ll give credit where it is due, but I think this statement is really important to think about at this juncture. “What would you do if a fastball was flying towards your head? Buy and hold investors would do nothing and take the punishment!” Meanwhile, in spite of two cyclical bull markets in the last ten years, the stock market as measured by the S&P 500 is still 22% below levels seen at the market peak in 2000, and 26% lower than it was in 2007.

Dave Rosenberg, chief economist and strategist at Gluskin Sheff, warned this week that his ratio of trading volume on the New York Stock Exchange versus volume on the Nasdaq, is a sign of speculation. The current levels of risk taking are surging beyond levels seen during any period in the past 10 years.

The Hulbert Nasdaq Newsletter Sentiment Index, which measures the average exposure of newsletters to Nasdaq stocks, now stands at 80%, which Hulbert classifies as “dangerously high”. Hulbert says to find a higher reading you’d have to go back to July, 2000 [about 3 months after the Nasdaq had topped out into its severe 2000-2002 bear market, when newsletters were still bullish and saying it would only be a minor correction].

Carl Swenlin, editor of Decisionpoint reports that investor assets in Rydex money market funds and ‘inverse’ (bear-type) funds are at multi-year lows, while assets in Rydex bullish Index and sector funds are at their highest level since the October, 2007 market top. There is currently $7.50 in bullish funds for every $1 in bearish funds. Alan Newman, editor of Crosscurrents, says “It’s the most ridiculously one-sided investor sentiment we have seen since the high-tech mania [in 1999] convinced folks that no price for a stock was too high to pay.”

Last week the market had the highest weekly volume of the year. Unfortunately for the bulls, it was a down week. The small head and shoulders top formation was broken today and it appears that Europe is falling apart at the seams.

Today will be another, in a series of distribution days. Yes, the market has bounced back after the down days, but always on lower volume. Remember volume equals conviction.

The major averages are all trading above their respective 50 day moving averages which should provide some support. However should they fall through those averages, a bigger correction could be coming.

The biggest problem with the recovery is that it has been supported through the creation of more government debt, in an unprecedented fashion. Recall that the government needs tax money to support its various programs. However, in the last few years they have created even more, bigger government programs and spending, at a time when most Americans have been pinched by the double whammy of falling real estate prices and a drop in the value of their retirement accounts.

Imagine if you went out for drinks with a friend that asked if you could buy the rounds because they were short on cash. Then a while later you have lunch with the same friend who asks you cover the tab because things are tight. Soon after you see them pull up in a brand new Cadillac Escalade. You would wonder where they got the funds to make that purchase. That is my wonderment about our current global government bailout programs. Doesn’t anyone wonder where all this money for Greece and healthcare, etc., etc., etc. is coming from?

Our unborn children and grandchildren should very upset. To bail out our debt problem with more debt seems unfathomable. At some point the markets are going to consider the sustainability of that plan. Maybe that day is today.