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Imperial1964 (97.77)

I'm calling a top. Here's why.

Recs

18

October 12, 2007 – Comments (9)

I'm going to make the very bold statement that the S&P has reached a top intraday today and we are in for at least a correction, and in my expectations a bear market.  Here's why:

-Most obviously and recently, profit warnings.  Profits have beaten expectations for the last several quarters.  Not this time.  About a half-dozen companies warned today.

-These profit warnings should put us at about 0% earnings growth for the S&P, after being revised downward already.  0 or negative earnings growth has never occurred without a bear market.

-A housing recession has never occurred without a recession and bear market.

-Recent, huge increases in credit card debt and foreclosures do not show a healthy consumer (70% of the economy) 

-Profit margins are at multi-year highs, but they always revert to the mean eventually.  Does a market P/E of 18 sound good with no current quarter growth and collapsing margins down the road? 

-The Federal reserve cutting .5% off the Fed funds rate with the stock market near all-time highs and unemployment low.  You think they know something we don't... yet?

-The Dow Transports have NOT confirmed the movements of the other indices.

-The S&P has been in an upward triangle the last several days and it just broke downward.

-Most major indices have been shaping up for nice looking double-tops, with rising prices accompanying falling volume.  Today they all broke downward, with good volume.

The argument that "we've beaten expectations for the last several quarters, we'll probably do it again" has been voided by the profit warnings.  The argument that "the Fed will save us" is baloney.  If we need a half-point rate cut and more (expected) subsequent cuts, we ARE in trouble.  And as far as "globalization and a weak dollar will save us", do you really think this time is different? 

As for my (non-retirement) portfolio?  I'm trying to evaluate how much I believe in my picks outperforming cash right now.

9 Comments – Post Your Own

#1) On October 12, 2007 at 2:15 AM, QualityPicks (74.74) wrote:

Thanks for your comments. We rarely top in one day, but certainly, today was the first warning. I know as soon as I'm feeling excited, and my CAPS score gets to around 90, we are getting very extended and we are due for a pullback/correction. :) Today was no exception.

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#2) On October 12, 2007 at 5:59 AM, MakeItSeven (32.41) wrote:

Other bearish factors:

-Despite all the new highs, money are actually being pulled out of equity funds, especially domestic funds:

"Including ETF activity, Equity funds report net cash outflows totaling -$812 million in the week ended 10/10/07 with Domestic funds reporting net outflows of -$3.768 billion and Non-domestic funds reporting net inflows of $2.956 billion;"

-  Breadth is negative behind the large caps:

 "within the S&P 500 Index, only the larger names are outperforming.  Case in point: Over the last three months, the total return (i.e. including dividends) of the S&P 500 Index is 2.03%.  However, on an equal weighted basis, the S&P 500 Index is actually down 2.19% over the last three months."

- Speculative Chinese stocks run wild. It's the pets.com symptom of greed getting out of control.

-  Container traffic is stagnant.at LA port idicating low expectation from businesses.

-  Despite the low put/call ratio, the put premium is much higher than the call premium.  This big put-call premium diffference only happened twice recently: in July before the market plunged and in 2001.

- The leading indicators for the 25 countries in the Organization for Economic Co-operation and Development (OECD) are weakening.

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#3) On October 12, 2007 at 10:36 AM, leohaas (32.01) wrote:

Great blog. Isn't there anyone on CAPS who can summarize the bullish arguments? I'm always interested in both sides to a story, so I'd love to see those here!

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#4) On October 12, 2007 at 12:02 PM, Imperial1964 (97.77) wrote:

I realize calling a top is a fool's game, but this Fool is giving it a stab anyway.

FYI, I decided not to cash out my portfolio and ride it out.  I've only been a stock investor for about 3 months, so the experience will be more valuable than the losses on my small portfolio. 

 

I'll try to summarize the bullish arguments:

-Growth has beat estimates for several recent quarters, primarily due to increases in exports and exchange rates that are more favorable to exporters.  This trend will continue.  The slowdown has already been priced in, so when earnings continue to beat estimates, the market will resume its climb.

-P/Es are reasonable at an average (last I checked) of about 18 for the S&P.  That's cheap for recent history. 

-The economy is slowing, but it is still going fairly strong.  If we avoid recession and growth picks up, stocks are super CHEAP.  People have been calling a recession spilling over from the housing market for well over a year and it hasn't happened yet--just a slowdown.

-The Federal Reserve will continue cutting rates, which will boost stocks and growth (and inflation) and burn anyone who puts on a bearish bet.

-There is a lot of money sloshing around in the financial markets, and it has to go somewhere.  What better place than stocks for long-term money?  We're in a bear market for bonds, interest rates are low and may go lower.  Where else can you get decent returns that beat inflation?

-For a long enough time period (over 10 years) stocks have always been bullish since the great depression.

What am I missing from the bul argument? 

The key to beating the market is knowing both sides of the argument and knowing why the guy on the other side of the trade is most likely wrong.  If you understand the argument better than he does and find a flaw in his logic, you have found an opportunity to profit substantially.

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#5) On October 13, 2007 at 1:29 PM, Imperial1964 (97.77) wrote:

For the bullish argument I missed that personal income has risen 6.8% YOY, which should at least partially offset rising mortgage rates and slowing mortgage equity withdraw.

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#6) On November 05, 2007 at 4:39 PM, Imperial1964 (97.77) wrote:

Adding to the bearish argument is that stock valuations are very high if you normalize for profit margins.

Price to revenue is 50% above the 1987 and '73-74 crashes.

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#7) On November 18, 2007 at 12:26 AM, abitare (31.95) wrote:

Good call. Recession = 100% chance

Depression? Maybe = looking more likely

Hyperinflation - less likely, but possible

Stagflation - likely

 

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#8) On July 09, 2008 at 2:22 AM, DemonDoug (80.36) wrote:

Very good call!  Nailed it to the day lol.

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#9) On October 08, 2008 at 2:24 PM, KWT8011 (< 20) wrote:

"1. I should have more than 8 recs for thoroughly laying out the bear case, correctly calling the day of the top, and correctly targeting the S&P at 1100 (not to toot my own horn or anything)."

Haha that was good enough for me to rec this for you (and your other post as well 

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