Stock Pick Alerts

Stock Pick Alerts are a periodical and not so often special service for some of our loyal Private Equity Customers. We select these special stock Picks from some of our just-in-time Institutional Equity Research featuring stocks with a current high probability for quick gains. We normally alert our clients via direct individual contact with an email or a phone call. We do this rather than in the news letter format; thus keeping the distribution limited, timely and discrete. Contact Us for more information.

Perspectives on the US Stock Market

Pulling the Nasdaq in their Wake

Stocks with the heaviest index weightings accounted for most of the gains*

Volume is the weapon of the Bull

US Stocks Are Not Cheap; How High is High?

The Nasdaq Composite Index, which contains some of the biggest names in tech, hit a milestone, crossing 6,000 for the first time. Year-to-date, the Nasdaq has gained almost 12 percent, while the Standard & Poor’s 500 is up 6.6 percent. What this means to future market performance is the subject of ongoing debate: the bulls say new highs presage more gains; the bears see an expensive market beset by risks as the Federal Reserve prepares additional interest-rate increases.

As is so often the case, the truth is both more nuanced and somewhere in the middle.

Our context for thinking about markets is the psychology of longer-term secular cycles and how broad or narrow markets are (more on this shortly). Of lesser concern to me are the usual issues of valuation and rising rates. Let’s consider each in turn.

By just about any valuation metric you care to use, U.S. stocks are not cheap; however, too many investors are overly concerned about valuations. Why? Fair value is a theoretical point that stocks careen past on their way to becoming wildly expensive or extremely cheap; it isn’t the point where equities gently come to rest.

Recent history informs us that this matters a great deal to investors. As we have noted before, overvalued stocks can and do stay overvalued for long periods of time. In the mid-1990s, pricey stocks became even pricier, with the S&P 500 notching high double-digit gains for five consecutive years (1995 = 34 percent; 1996 = 20 percent; 1997 = 31 percent; 1998 = 27 percent; and 1999 = 20 percent). If you avoided stocks because they were expensive, you missed a lot of gains. Similarly, in the 1970s, cheap stocks got even cheaper. By the time that decade ended, price-to-earnings ratios were in the single digits — but you had little or nothing to show for buying cheap equities during the prior 15 years; and that’s before accounting for very high inflation.

The stock market adage "Volume is the weapon of the Bull" means that Bull markets are powered by strong demand for stocks, which translates into sustained buying volume. Courtesy of The Big Picture, here is a chart displaying volume and price of the S&P 500 over the past two years.

Thus, valuation alone isn’t the single determining factor many investors believe. Rather, market valuation should help you adjust your future return expectations.

Topping Patterns on S&P 500 Price Index 2000, 2008, >>>> 2017?

Volume is the weapon of the Bull

Volume peaked in July 2009, a few months off the March 2009 bottom, and has slipped since except for a modest blip up last summer--a period of decline, which suggests the volume was selling, not buying.But, then came the “Trump Rally” and volume exploded in 2017.

This year's dramatic rise in stocks coincides with a collapse in volume. If volume is the weapon of the Bull, and volume is declining, then what we have here is either:

1. a market that lacks buying volume and is thus held aloft by opaque interventions

2. a new kind of Bull market which rises magically despite declining participation by investors.

Magic is of course not unknown in economics or finance; stripped of academic mumbo-jumbo, economic growth arises, we are told, from the emergence of "animal spirits."(see: Armen Alchian on “Uncertainty, Evolution, and Economic Theory”). Financial speculation, we are told, is akin to dancing to the music (sounds fun!), with the only advice being to keep dancing until the music stops.

This chart is saying the Bull Market is bogus.

Many excellent technicians see no real evidence of weakness, and those analysts with a fundamental perspective see the Federal Reserve's $6-$8 billion in near-daily injections of POMO cash and rising corporate profits as reasons for the market to loft ever higher.

Permanent Open Market Operations (POMO) are used by the Federal Reserve to inject cash into the banking system as routine daily operations via loans like repurchase agreement (repos).

The value of U.S. stock markets is around $14 trillion, roughly the same as the national GDP of around $14.5 trillion (if official stats are to be believed). Can $6 billion in daily cash buying really sustain a $14 trillion market? That is asking a lot of an essentially trivial sum of money.

As for corporate profits--it's not just the profits that count, of course, it's the multiple people are willing to pay to own that income stream. Depending on which profit numbers you're using (trailing, i.e. reported, or estimated, i.e. projections), the recent historical market high PEs for the S&P have traded at multiples that have averaged somewhere between 12 and 16.

Current S&P 500 PE Ratio: 25.32

At market bottoms, this multiple falls to around 6 or 7. So profits could remain at their current high level and the stock market could lose half its value, and it would remain within the boundaries of historical valuations.

Thanks to unprecedented U S Government/Fed intervention, the S&P 500 has shot up above the Double Top resistance at 1,500 in the last 4 years.

Is this the upside break-out or just a “Bear Trap”?

Is it a top or will it break-out again to the upside from what may be a classic Expanding Flag Chart Pattern?

The break-out to the upside could project to 3,400 which would be massive. With expanding volume!

A break-down could go back to previous cycle tops of 1,500 or re-trace to the previous accumulation area of 1,100

Lots of excitement looming here

"Bulls: Be careful of Declining Volume with further stock market run-ups from here!"

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