Don’t Expect To Set Any Record Highs Yet This Year

Stocks will not break any new records this year as the signs of a market top are growing, my work shows they have topped.

We will likely see the annual rally into year-end as fund managers look for deals and boost performance, but participants need to consider these things that augur of longer-term weakness. So, capitalize on weakness in stocks this Quarter.

The S&P 500 dropped 12.4% from its 21 May record high through the 25 August quick dip, the 1st correction of more than 10% years.

The benchmark stock has declined 5.2% YTD to 1,951.36 as of 2 October.

Below are the Key indicators that the market has topped, as follows;

  1. Junk Bond Cancellations: High-yield are being canceled or re-priced by investors worried about higher risks. Olin, Altice, Santander Holdings , & Associates Properties and Westfield Corp. either canceled debt sales or modified them. Also, the worry that the widening of credit spreads, the difference in yield between 2 bonds of similar maturity but unequal credit ratings.
  2. Company Scandals: of yesteryear were rocked by scandals at Drexel Burnham Lambert, Enron, Worldcom, Qwest, Tyco, Lehman Brothers, Countrywide and Bernard L. Madoff Investment Securities. This time around, Volkswagen, Petrobras and General Motors are hurting corporate credibility.
  3. Declining Profitability: “Without strong Q-4 earnings, it is probable that FY 2015 EPS (earnings per share) will slip into contraction. That has not been seen since Ys 2007 and 2008, and before that Y 2001.
  4. Neutral to Tighter Monetary Policy: After the Y 2008 financial crisis, the Fed helped to support markets with QE (quantitative easing), read buying government debt and mortgage-backed securities to push down interest rates and boost the money supply. But its debt holdings steadied last year as the 3rd QE program ended. Now, the Fed balance sheet is flattening, and over the course of the anemic recovery, that has cause more volatility.

The major risk to the Bearish outlook for stocks is renewed monetary stimulus from the Fed that interferes with The Hand of market forces described by economist Adam Smith.

The last month the Fed held its target fed funds rate at a record low at Zero+%, where it’s been for about 7 years.

The fear in the market is that the Fed may attempt to cut off its Hand, and and move us even closer to the Chinese model a fully managed economy with another full-blown QE-4 program that could drive stocks further North.

for SPY:OverallShortIntermediateLong
Bearish (-0.33)Neutral (-0.08)Bearish (-0.35)Very Bearish (-0.56)

Have a terrific weekend.