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Wednesday, May 31, 2017

Daily update 5/31 Why I think Stocks Won’t Crash Spectacularly but ...

A little selling and a little buying to end the month.

The buying and selling action left us with a hanging man bar.  That follows double doji bars.  Lots of indecision here.  Breadth was just slightly negative, but started the day +55%.  New highs increased quite a bit to 172.  New lows also increased to 98.  That is the highest number of new lows since early March.  The high this morning was less then 3 points from the all time high.  New lows should not be that high here. 

The futures tested below the 20 SMA this morning, but bounced the rest of the day.  They popped up 4 points after hours for a reason unknown to me at the moment.  The consolidation phase continues for now.  Will it be a pause that refreshes or a top?

The green count slipped a bit more today and is barely above 50 now. 

Three trading days after SPX broke out to a new high there has been absolutely no follow through.  At the same time there are plenty of dip buyers to rush in on any intraday weakness.  It is the rally chasers that are still missing in action.  They seem to totally disappear every time SPX climbs above 2400.  Until that changes the market is not going higher.  Bears need to see a close back below 2400.

This is an interesting article everybody should read just in case.  Why I think Stocks Won’t Crash Spectacularly but May Zigzag Lower in Agonizing Ups-and-Downs, Possibly for Decades 

Because of the high margin debt it is pretty hard for me to imagine stocks not crashing pretty spectacularly at some point.  A pattern like Japan with many ups and downs for a prolonged period seems pretty likely after that.

On yesterday's article on bubbles I believe both types of bubbles are in play.  Clearly monetary policy has created bubbles all around the world in many assets.  However, I also believe there is a story type bubble going on as well.  What else can explain why 5 stocks make up over 10% of the market cap of the entire U.S. market.  Those are story stocks.  How many times have we heard about some model that magically shows stocks aren't overvalued.  The funny thing is they never provide historical data that can be used to verify their claim.  Not to mention those people always seem to be long only money managers.  Check out these TTM P/Es.

Keep in mind profit margins are way higher then they were in 2000.  With the same profit margins valuations would be very close to 2000 levels.  That Russell 2000 sporting an 81 P/E sure looks awfully cheap to me.  I guess I better back the truck up.  Does it make any difference if we have a double bubble?  Maybe, 1929 was the last time it happened.


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