The stock market keeps reaching new highs on the major indices: The Dow Jones Industrial Average did it in mid-May, and the S&P 500 and the NASDAQ did it in mid-June. A casual glance at the evening news headlines gives the sense that all is well in the financial markets.
Last week’s column discussed a Harris poll showing that 56% of Americans think we are already in a recession, which couldn’t be farther from the truth. Gross domestic product (GDP) — a preferred yardstick for the economy — is growing at a more than 3% annual rate.
How could so many people be so misinformed? Likely because they are personally feeling squeezed by higher prices and rising credit card debt, not to mention by unnerving political commentary about our economic problems.
After last week’s column was written, it was reported that the University of Michigan Consumer Confidence index dropped sharply to 65.6 in June from 69.1 the previous month. And before the report, a survey of economists was expecting this index to rise to 72!
Pessimism is contagious. And so is optimism. But reality eventually rules. So, perhaps now it’s time to ask this question: Could the investing public be equally misinformed about this bull stock market as it makes new highs?
Oncoming bear?
It’s highly possible that the stock market headlines about new highs are masking a treacherous oncoming decline that could hit just as baby boomers retire and start depending on their pool of savings for income.
James Stack of InvesTech Research, who manages billions for his clients and has repeatedly been ranked highly on Barron’s “Top 100 Financial Advisers” list, has been worried about stock market overvaluation for months, even as the market moved higher.
Stack explains that he is not a market timer but rather a risk manager. Thus, he has had a high position of cash (in the form of Treasury bills) for many months. Stack notes that markets can turn down swiftly, once all the buyers are “all in.”
But something happened recently that makes Stack especially nervous about the near-term prospects for the stock market. As he explained in a message to subscribers:
“On Tuesday, June 11, both the Nasdaq Index and S&P 500 Index hit new highs.
“HOWEVER, the number of declining stocks outnumbered advancing stocks on both exchanges. AND there were more stocks hitting new 52-week (yearly) lows than were hitting new 52-week highs on both exchanges.
“What is truly unusual is that it ALMOST happened a second time on Thursday, June 13 — except there were slightly more (4) stocks hitting new yearly highs than new lows on the NYSE.”
Stack noted that it is highly unusual for an index to hit new highs while more stocks decline than advance. He continued:
“When looking at this negative warning on the two exchanges separately (i.e., occurring on one, but not the other), there were a half dozen instances in each index — (12 total) — with the greatest number occurring in the final year before the 2000 Tech Bubble Peak.”
Notably, Stack called that market decline correctly — several months in advance of the actual market “crash” that took the leading indexes down roughly 50%. In fact, he has just told his subscribers and clients that the circumstances of “overvaluation” in the market today are very reminiscent of the months before the “dot-com bubble” burst. He wrote:
“Overall, this confirms the narrowing participation and deteriorating leadership that has been progressively eating away at the current bull market’s momentum, and also suggests that volatility could soon start to increase.
“In looking at the raw data and increasing amount of downside leadership (new lows), there is a possibility that InvesTech’s Negative Leadership Composite could start to trigger or signal ‘Bear Market Distribution’ within the next 10 days.”
An opportunity
Lest you think Stack is one of those perma-bears, he also called the bottom of the market in 2009 amid general doom and gloom — another very timely call. He explains that he maintains a cash position to be able to buy bargains when others are out of money and out of hope.
One thing is sure: A bear market now would have a devastating impact on those just retiring — and planning to live on their investment savings. If a prominent and successful money manager can advise holding a significant amount of “chicken money” in T-bills, maybe you want to take another look at your portfolio. And that’s The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)
