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Friday, March 20, 2015

Daily update 3/20 Biotech bubble and Fisher says stocks hyper overpriced

The bulls showed up today to send some indexes to new highs.


SPX got within 4 points of its high close before turning down going into the close.  Breadth was +77%.  New highs were the highest since Jan. at 299.  That is more then double the new highs from yesterday.  A sudden jump in market internals like that sometimes ends up being a buying climax that leads to a short term top.  There are many short term tops on expiration Friday as well.  Monday is going to be interesting.  Will the March pattern of no consecutive up days play out once again or will it be different this time?


The futures ended up at the post FED meeting high to the tick.  SPX managed to close a little more then 1 point higher.  For as strong as today was there was not any new ground reached.  Notice how the DI lines are braided on this rally.  That indicates a lack of trend.  This pattern is inherently unstable and unpredictable.  This is not something we have seen since I have shown the chart on the blog. That is problematical to have a retest of a prior high with a trendless move up.  I believe the odds favor a failed retest here that leads to lower prices.

The COMPX and IWM made new highs.  Still missing from the new high list this year are the transports and XLF.  Key indexes that must make new highs to keep the rally going.  I just have a feeling they won't have the juice.  The market internals are showing lots of divergences.  Check out the number of SPX stocks above their 200 MAs.


The last pullback was really shallow.  I am surprised to see the divergence this big.  There are many internals in the same or worse shape.  We will see what happens next week, but I believe it will be a tall order for SPX to get significantly higher from here.

The biotech ETF IBB had a big gap up today and is up around 20% this year.  Here is a look at the monthly chart.


About a year ago I heard someone on TV say the P/E on IBB was 199.  I can't even imagine what it is today.  I recently read an article saying they have brought out some biotech IPOs with drugs that were only in clinical trials and they have never done that before.  Can anybody say dot com.  The chart and the atmosphere surrounding these stocks is clearly indicating a bubble.  There are around 106 stocks in IBB.  That is pretty comparable to the NDX 100 that was the big bubble in 2000.  Here is a look at its run up into the top.


That was some run up and crash. They sure look a lot alike don't they. NDX still has not gotten quite back to that peak and it has been 15 years.  Now lets look at the daily IBB chart.


Notice the high volume the last two days.  This ETF has been going up for years and people are just now piling in?  This looks like a pretty high risk of being a volume climax top of considerable consequence.

The trouble with parabolic moves up like IBB has made is they always seem to end in a crash.  Everybody piles in slowly, but they all want out at the same time.  There are some fine companies in the biotech space along with the junk.  During a crash they throw the baby out with the bath water.  If history is any guide many of those fine companies will see their stocks seriously hurt.  The junk will end up going out of business.

If the biotech sector is about to top and crash will it take the broad market down like NDX did in 2000-02?  It certainly has the potential.  Last spring when the sector had a correction there were quite a few times when it dragged SPX down with it.  I even commented on it in the blog on numerous occasions.  I think I will have to keep an eye on this one for a while to see what happens.

I happened to be listenng to the TV when they interviewed retiring FED president Richard Fisher today.  There is a clip you can listen to at "Market Is Hyper Overpriced" Warns Retiring Fed President; "Significiant Correction" Coming  He has been classified as a hawk, but he made some rather frank comments for a central banker.  I could not believe it when he said the market was hyper overpriced.  I about fell out of my chair.
Santelli: “If you had to rate the US economy 0-10 where would you peg it?”

Fisher: “We’re #1., we’re a 10. We’re the epicenter of growth and in the sweet spot.”

Santelli: “Do you think any part of the stock market being high has anything to do with the committee you just left and if you didn’t grade the economy on a curve would you still give it a 10?” 

Fisher: “Well, what worries me is how totally lazy investors have gotten, totally dependent on the Federal Reserve and I find this to be a precarious situation.”

Fisher: “Are we vulnerable in my personal opinion to a significant equity market correction? I believe we are.” 

The comments on what happened with Yellen this week are quite interesting.  Some people heard rate hikes have been pushed out way into the future.   Yellen said several things that we already seem to know.  Which makes the market reaction seem a bit much.  We were all pretty sure the word patient would be dropped.  There is supposed to be at least a two meeting lag after patient was removed before a hike.  That meant there should be no hike in April, but there could be a hike in June.  Before the meeting the FED funds futures were indicating the Sept. or Oct. meetings were the most likely time to hike.  During her press conference Yellen specifically said there would be no hike in April (knew that).  She also said they may or may not hike in June (knew that).  Then she said they planned to hike this year (knew that).  What exactly is different?  Then there was this today.

Atlanta Federal Reserve President Dennis Lockhart said on Friday he expects the U.S. central bank to raise interest rates at either its June, July or September policy meetings, barring a significant downturn in the U.S. economy.  


"I continue to believe that mid-year or a little later is appropriate timing. That would allow the June meeting to clearly be taken seriously as a meeting for the 'lift-off' decision. I would add to that July ... And, of course, September," Lockhart said. 

"I can't be certain it is going to happen in those three months ... But I think it is realistic to assume that is the period in which we will be taking on this decision with a high likelihood of pulling the trigger," said Lockhart, a Fed centrist. 

That was today and after Yellen.  Lockhart is pretty much considered middle of the road on the hawkish/dovish scale.  It seems like his comments should be taken into consideration.  Which pretty much validates what I said above.  Nothing that we did not already know happened with this FED meeting.  I don't know if this increases the odds of a complete retrace of the move or not, but I thought it worth mentioning.

The market and sector status pages have been updated.  Have a great weekend.

Bob

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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.