Market Tops Take Time

Miles Franklin sponsored this article by Gary Christenson.

“Please, God, just one more bubble.” – Bumper sticker, Silicon Valley, 2003.

In early July 2018 I wrote about market parallels between 2000 and 2018. The link is here. The article listed the tops from the 2018 stock market bubble. An updated list follows:

SO WHAT?

• The DOW, Transports, DAX, S&P 500 and Nikkei 225 peaked in January, over six months ago. They might rally and reach new highs, but after half a year… it looks unlikely. See graphs below.

• The NASDAQ Index and the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have accounted for most of the gain in the NASDAQ and S&P 500. When they collapse the NASDAQ game is over.

• The topping process in 2000 took from January to September, so an extended topping process for 2018 is no surprise.

• The FAANG stocks have run up too far and too fast. These media darlings will disappoint someday, but the craziness may not be over yet. Apple hit a new all-time high today, August 1. The Elliott Wave folks projected a top (months ago) for Amazon of $1,900. So far the top has been $1,880, close enough.

• The larger the liquidity induced rally, the larger the crash. Remember the NASDAQ 100 in 2000 – a drop of 84% top to bottom.

Read: “The FAANG-nary in the Coal Mine” by Adam Taggart.

FUNCTIONING MARKETS?

From Charles Hugh Smith: “Here’s What We’ve Lost in the Last Decade”

“Functioning markets. Free markets discover price and assess risk. What passes for markets now are little more than signaling devices to convince us the economy is doing spectacularly well. It is doing spectacularly well, but only for the top .1% of 1% and the class of managerial/technocrat flunkies and apologists who serve the interest of the top .1%.”

When High-Frequency-Trading (HFT) machines control most volume and humans are not involved, exaggerated moves higher and lower are likely. The stock markets have moved higher since 2009, thanks to Quantitative Easing, $ trillions in corporate buybacks, rock-bottom interest rates, a new housing bubble, massive central bank liquidity flows into stocks, international purchases of stocks, HFT, and managed data, statistics and press releases.

There is a substantial risk that all these stock market beneficial “tail-winds” will not continue.

CONSUMER CONFIDENCE – AT NEW HIGHS?

“Funds Lift U.S. Stocks to highest allocation in more than three years.”

Confidence, highest allocation to stocks and everything is wonderful… or not?

“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”  – John Templeton

WHAT ABOUT STOCK INDEXES AND INDIVIDUAL STOCKS?

The Disparity Index measures the difference between price and the 40 week moving average of the price. High readings are cause for concern that momentum will decline and the index or stock could begin a lengthy correction.

Examine the weekly charts for the DOW which peaked in January and the NASDAQ which peaked in July. The NASDAQ may rise to new highs this fall, but who knows in managed markets?

Examine the weekly charts of Facebook, Amazon, Apple and Netflix. Apple reached a new all-time high on August 1. Facebook tumbled in July and created a record market capitalization loss. Netflix disappointed.

Amazon reached a crazy new high of almost $1,900 per share. Amazon shares sold for $26 in August of 2006. Think too far, too fast!

CONCLUSIONS:

• In “managed” stock markets, there are few guarantees.

• Price to Earnings Ratios (P/E) are high. Example: Amazon stock P/E = 226.

• Momentum has moved to the NASDAQ as it did before the 2000 crash.

• The Disparity Index shows over-bought conditions in the NASDAQ and FAANG stocks. This indicator can become more over-bought, but does the risk of a crash outweigh the possible gain of a few percent?

• QE4-When… Not if!

• Silver and gold (read this, and this) reached highs in 2011, seven years ago. Their risk/reward fundamentals are far better than most over-bought NASDAQ stocks that could crash now or soon.

• “The stock market will always do whatever makes the greatest number of people look foolish.” – Unknown.

Miles Franklin will convert dollars retrieved from over-valued NASDAQ stocks into real money—gold and silver bullion and coins. Do it!

Gary Christenson