A Noteworthy Warning
Obviously, during a bubble one cannot get timing advice from John Hussman, and certainly not from us either (our guest author Frank Roellinger and his strict trend-following system are probably far more useful for this purpose- see 'The Modified Davis Method' for details). We can only provide some background information on money supply growth trends and the occasional update on technical conditions. Apart from that, we are frequently wont to pointing out that risk in the market seems quite large – but there is no telling when this risk will manifest itself. What we feel fairly certain about is that when it does manifest itself, it will catch many people unawares, and a lot of the gains that have been made will be given back in a lot less time than it took to attain them.
However, there is another man who is probably worth heeding regarding timing questions, namely Jim Stack. We say this because Stack turned very bullish early on in the recent bull market, and correctly stayed bullish even when the euro-land debt crisis made it appear in 2011 as though the market was on its way back down. We therefore noted with interest that according to a recent press report, Stack is very cautious at the moment:
“One of the first independent advisers to call the current bull market is now raising a cautionary flag. James Stack, president of Stack Investment Research, warns subscribers to his newsletter, InvesTech Research, that the 5-year-old bull is aging rapidly. Although he hasn’t recommended selling stocks just yet, he says risk is rising and has one eye on the exits.
Attention must be paid. Early in his career, Stack, along with the late, great Marty Zweig, predicted the 1987 stock market crash. Twenty years later, in August 2007, he wrote: “We are taking steps to reduce exposure as warning flags increase.”
But unlike some perma-bears who never know when to quit, Stack turned bullish again in early 2009. I remember a conversation at a conference in Orlando that February in which he made the case for a new bull market while I was still very doom-and-gloom.
In a telephone interview from his headquarters in idyllic Whitefish, Mont., last week, Stack pointed out that 2013’s nearly 30% gain in the S&P was the 10th largest in the last 85 years. “I don’t think anyone who was positive on the outlook for 2013 could have expected the size of the advance we’ve seen…,” he told me. Meanwhile, he said, economic trends are “all entering 2014 in strong fashion,” presenting “little probability of a recession in the first half or three quarters of the year.”
But, he wrote in his most recent newsletter, “a strong economic outlook doesn’t negate the possibility of a bear market. The stock market leads the economy, and market peaks precede the start of recession by 5.5 months on average.”
All in all, he told me, “both macroeconomic and technical [indicators] still support more bull market highs in 2014.” But he’s getting worried. “Technically we’re about 15% above long-term historical valuations,” he said. The S&P 500 trades at 19x trailing-12-month earnings, vs. an average of 17x trailing earnings. And then there’s the calendar, particularly the four-year presidential cycle, which is of great interest to technicians and market historians. “The middle two quarters of a midterm election year are historically the weakest,” he said.”
Given that Jim Stack is a veteran of the markets and has made a number of quite prescient calls in the course of his career, we certainly agree that 'attention should be paid' to what he is saying. Interestingly he mentions the presidential cycle – we recently showed a chart of the average performance of the US stock market during mid term election years as well (i.e., the second year of the president's term). As a reminder, here it is again:
The average mid term election performance of the SPX from 1928 to today (blue line) vs. the 'average of all years' (red line), via Mike Burk – click to enlarge.
Below is a weekly chart of the SPX over the past three years. What is noteworthy is the wedge-like shape of the advance, as well as the recent multi-month divergence of the NYSE McClellan oscillator. Similar divergences were in evidence at previous market peaks.
As an aside, Stack may be right when he states that there is still time, as the market has a tendency to retest its highs or even make a new high in April in mid-term election years. Note also that a fairly weak January performance is apparently normal. Keep in mind though that it is not likely that the market will follow the template precisely.
One very notable historical market peak actually occurred in January, namely in early January 1973. This is worth mentioning because at the time the market had also just broken out to new highs and sentiment was almost as unanimously bullish as it is today (we say 'almost' because it was probably not quite as extreme as nowadays. At the end of 2013, new record highs in bullish sentiment were recorded in several indicators, but many of these indicators didn't exist in 1973, so a direct comparison is not possible). Even Alan Greenspan said two day before the 1973 peak that “there is no reason to be anything but bullish”. :)
Charts by: Mike Burk, StockCharts
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
5 Responses to “US Stock Market – Jim Stack Grows Cautious”
Most read in the last 20 days:
- A Historic Rally in Gold Stocks – and Most Investors Missed It
Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right? Successful stock market investing in two simple steps Photo via slideshare.net As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him: Thirty years ago, at an investment conference, there was a scalawag analyst...
- Gold and Negative Interest Rates
The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
- Why is the Stock Market so Strong?
Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured. Photo credit: Kjetil Ree Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
- Cultural Marxism and the Birth of Modern Thought-Crime
What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
- Why All Central Planning Is Doomed to Fail
Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works. A bunch of famous people with a simpleton view of how the...
- Gold Stampede
Stampeding Animals The mass impulse of a cattle stampede can be triggered by something as innocuous as a blowing tumbleweed. A sudden startle, or a perceived threat, is all it takes to it set off. Once the herd collectively begins charging in one direction it will eliminate everything in its path. Better get out of the way... stampeding bisons Photo credit: Surface Niusance The only chance a rancher has is to fire off a pistol with the hope that the shot...
- Russian Aggression Unmasked (Sort Of)
Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time: “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
- US Economy – Ongoing Distortions
Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below: A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge. Wholesale...
- Getting it Wrong on Silver
Erroneous Analysis of Precious Metals Fundamentals We came across an article at Bloomberg today, talking about silver supply troubles. We get it. The price of silver has rallied quite a lot, so the press needs to cover the story. They need to explain why. Must be a shortage developing, right? At first, we thought to just put out a short Soggy Dollars post highlighting the error. Then we thought we would go deeper. Here’s a graph showing the price action in silver since the...
- Political Pundits, or Getting Paid for Wishful Thinking
Bill Kristol - the Gartman of Politics? It has become a popular sport at Zerohedge to make fun of financial pundits who appear regularly on TV and tend to be consistently wrong with their market calls. While this Schadenfreude type reportage may strike some as a bit dubious, it should be noted that it is quite harmless compared to continually leading people astray with dodgy advice. To answer the question posed in the picture with the benefit of hindsight: not really.... (look...
- 100 Years of Mismanagement
Lost From the Get-Go There must be some dark corner of Hell warming up for modern, mainstream economists. They helped bring on the worst bubble ever… with their theories of efficient markets and modern portfolio management. They failed to see it for what it was. Then, when trouble came, they made it worse. But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves. The scalawag himself. Keynes provided governments with the...
- Running Mate Turns Into Fall Girl
Odd Couple While checking on the US primaries a few days ago, we came across a piece of news informing us that pretend candle-swallower Ted Cruz had picked Carly Fiorina as his “vice-presidential running mate”. Our first thought upon hearing this was “WTF”? The match made in heaven... two loooosers find each other. Photo credit: AP It's not so much that he's picking another “loooooser” as The Donald would put it...the real absurdity of it is that...