Will this pesky mini-bull market never end? Not if you believe the mainstream financial press which informs us that the long-awaited economic recovery is finally upon us, not only justifying the market’s gains thus far, but assuring us still happier days ahead. But one need only to scratch slightly below the surface to see that the “bull market” is much closer to its peak than its lows.

Stocks managed to squeeze out new highs last week, but aside from the “new highs” headline, there was nothing at all impressive about the gains. As I’ve recently discussed, waning upside momentum is flashing a danger signal and last week’s mediocre performance did nothing to quell that stance.

The Nasdaq Composite, S&P 500 and Dow all exceeded former highs by marginal amounts last week but finished their sessions lower on the day, leaving bearish reversal signals in their wake. To be sure this market has seen its fair share of one-day reversals, none of which have signaled anything more than the beginnings of minor corrections.

But combined with the continued lack of upside momentum in the market averages we have to wonder if last recent action presages more significant weakness. In a genuine bull market we would expect new highs to draw in more buyers, enthused and encouraged by continued upside progress. But every new S&P 500 high over the past three months has resulted in a correction soon thereafter, before any meaningful upside progress could be registered. 

The media talks about a bull market, the powers that be prattle on about recovery, but where is the market’s enthusiasm?  If happy days are truly here again, why must the market struggle with every new high?

But What About That Wild Nasdaq?!

Bulls may argue that waning momentum in the S&P 500 means little as the Nasdaq rockets higher.  But in fact, the Nasdaq’s strength serves only to bolster concerns.  This “hotbed of speculative activity” is enjoying stellar relative strength primarily due to the increased activity of gamblers hoping that the “glory days” of yesterday’s bull market are back. Newsflash:  yesterday’s leaders never lead the next bull market. 

Speculation is the hallmark of market tops, not bottoms. And what would you call it but speculation? Investors are gobbling up the least profitable companies (techs) and driving them to triple-digit gains while companies actually turning a profit languish. The broader market struggles to climb while gamblers drive garbage up into the stratosphere.

In any event, the Nasdaq’s performance is hardly all that impressive. That a market which lost nearly 80% of its value should bounce a bit harder and farther than the S&P 500 (which lost only 50%) should come as no big surprise. The farther they fall, the harder they bounce.  But no matter how high the proverbial dead cat bounces, it’s still dead.

Investment Or Speculation?

Not convinced that we’re witnessing mere speculation? Take a gander at who’s buying and who’s selling. Thomson Financial reports that last month’s ratio of insider sales to buys hit a record 59 to 1. That’s 59 shares sold for every one purchased! And it surpasses the previous record of 41 to 1, set in May 2001, by a mile.

In May of 2001, by the way, the market completed its first official “sucker’s rally”, having gained more than 21% before plunging another 41% over the next 1-1/2 years. Today, insiders are selling stock at an even more frenzied pace!

Meanwhile Investors Intelligence recently reported that the proportion of bulls stood at over 50% for the 25th consecutive week, a record never before witnessed in the company’s 40-year history. The public is more bullish today than it was at the peak of the greatest bull market ever!

Professional money managers, most of whom consistently fail to beat the market, are not immune to bull fever either. A recent Barron’s survey demonstrates that in this group, bulls outnumber bears by 5 to 1.

The public is more bullish than ever. Corporate insiders, the folks most intimately aware of their companies’ futures are selling more stock than ever. Come on folks!  Let’s get real for a minute, shall we? Insiders are bailing while the public is gobbling up stocks. Do you really believe that there’s a lot of upside to be had from here? When the p/e ratio of the S&P 500 stands at just under 35?

What are today’s buyers betting on? Valuations in the 50s? 60s? 70s? Sure that’ll happen. But why not invest in lottery tickets instead?  Your odds are MUCH better!

Bulls at record highs, valuations at record highs, insider sales at record highs:  the makings of a fledgling bull? Yeah right!

Reaction to Fundamentals Flashes Warning

Even when putting technical considerations aside, bulls have plenty of reason to be alarmed. The market has been anticipating recovery and it got “proof” of one: GDP growth at a 19-year record! Unemployment figures improving for the third consecutive month! Widely-followed tech-darling Cisco posting mighty impressive results!

All that lovely bullish data and where’s the market today? Barely changed from where it was before the news came out.

That tells us that the character of the market is changing. For quite a while we’ve seen it ignore bad news and rally on positive news. It’s still not terribly upset over bad news, but the good news seems to be losing its magic.

If great news isn’t going to rally this market further, WHAT WILL?

If it took thirteen rate cuts, three tax cuts and massive money supply expansion to finally give us one quarter of decent growth and a few hundred points on the S&P 500, what’s it going to take to keep this rally going? I’m guessing a lot more than the financial engineers can provide.

Sure, we got a decent rally. We saw some decent growth in the third quarter. But what did it take to create that? Massive fiscal stimulus.  The kind of stuff that CANNOT be sustained. The only hope is that all this stimulus will push the economy over the edge and ignite a self-sustaining recovery. Will that happen? We shall see. But I’m not betting on it. 

Why not? Same story I’ve been telling for a while: the latest economic slowdown has NOT done the work of generating a foundation for sustained recovery. Consumers are MORE in debt than ever. Corporate profits have been boosted by cutting costs and laying off workers.  In John Challenger’s words,  “We put so much stimulus into the economy in the third quarter that the economy grew at its fastest pace since 1984. And yet there was a net job loss of 50,000 jobs in the third quarter.”

If this is a genuine recovery it should be generating hundreds of thousands of new jobs monthly. It’s not. So we’re left with a bunch of mega-indebted consumers who still aren’t finding jobs. This is to be the fertile ground from which the seeds of sustained economic growth are to spring forth? Good luck!

But Don’t Argue With the Trend

In the short-run, I’m not going to argue too much with this mini-bull market. Stocks were overpriced for years before finally topping out in 2000. Never try to call a top when gains are being made on irrational exuberance and whacked-out psychology.

But this game isn’t about callings tops and bottoms. Nobody can predict the future with any kind of accuracy nor consistency.  Successful traders and investors don’t become so by predicting. They do so by taking positions when the odds are in their favor, when potential reward outweighs potential risk.

Are the odds in favor of long positions right now?

Take a look around you folks: insiders dumping stock at a frenzied, record-setting pace, investors more bullish than ever, an economic recovery that steadfastly refuses to do the one thing a recovery is supposed to do – generate jobs.

Meanwhile gold, the harbinger of all things economically nasty, has surged to a 7-year high. The dollar, whose rally quickly ran out of steam, is plunging again, poised to set new multi-year lows. And the CRB Index of commodities has rocketed upward to a new 7-1/2 year high.

Do all these factors presage the inevitable demise of the mini-bull market? Perhaps not in the short-run. But in the intermediate to longer-term, this stock market doesn’t stand a chance. I’m willing to bet that we’re MUCH MUCH closer to the top than we are to the bottom.

Seriously folks, with all these contrary indications flashing big, bold, brilliant warning signs, where is the risk in this stock market?  In missing out on huge upside gains? Or getting caught buying inches away from the ultimate top? You do the math...

© 2003 Mark M. Rostenko
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