By: Dave Skarica
January 27, 2014
As we start the new year, we begin on the downside. 2014 sort of reminds me of 1990 in Japan or 2000 in US stocks in that a big top was made early in those years. I thought all along we would make an important top early in 2014.
Now some of you may wonder why I am so confident that this is not just the start of a correction or pullback, but rather the topping period for this market. Here are my reasons:
1. This bull market is getting old. The average bull market since 1932 has been about 165 weeks in duration. This bull market is nearly 260 weeks in length, ranking it the fourth longest bull market out of the 16 bull markets we’ve had since 1932. If this bull market lasted another two months, it would be the second longest bull market in history (with only the bull market of 1990 to 1998 being longer).
2. Money printing can stabilize things short term, but leads to disaster longer term. It’s like a drug or alcohol addiction: You feel good after you take your shot, but at some point you crash. People think that the market has stabilized and good times are here again; however, the inevitable hangover is going to be much worse than it would have been without money printing.
3. Sentiment. Indicators of sentiment, such as Investors Intelligence (a poll of investment writers), the Rydex Ratio (what investors are doing with their money), and NYSE Margin Debt (which has hit 2000 and 2007 levels) have reached levels that they normally see at major bull market tops, not just before corrections in the market.
4. Valuation. If you look at the CAPE (Shiller’s 10-year average P/E ratio), the P/E smoothed out over 10 years on the S&P 500 (INDEXSP:.INX) is now about 25, or the highest it has been since the 2000 bubble in stocks. This is a long-term indicator. However, at the very least it tells us that market returns in the next three to five years will be minimal at best.
5. Bubble symptoms in technology. Stocks like Yelp (NYSE:YELP), Facebook (NASDAQ:FB), and Twitter (NYSE:TWTR) all traded at 15 times revenues, or higher, at their peaks. In addition, even more established names such as Netflix (NASDAQ:NFLX), LinkedIn (NYSE:LNKD), and Amazon (NASDAQ:AMZN) trade at well over 100 times earnings. This is reminiscent of the 2000 tech bubble.
While there are problems in numerous emerging markets (Turkey, Thailand, and Argentina) which often prop up during bear markets (especially when there has been easy money propping these markets high), the fact remains that we now have too many dislocations in too many sectors, and stocks are too expensive.
Gold Goliath is not your typical gold dealer.