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Three Disturbing Facts for the Bulls

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The Dow’s push beyond 10,000 has covered up many of the disturbing numbers floating around. Of course, Wall Street doesn’t mind you thinking that everything is all right. For those willing to read between the lines, this article aims to provide some serious food for thought.

Yes, the stock market can be viewed through many lenses. Today, we take a look at some troubling short and long-term indicators:

Disturbing Fact #1: Volatility Index (VIX)

Over a year ago, the VIX was hovering just above 20 which is indicative of extreme complacency. It was no more than a few days later that the stock market plummeted 30 percent in 30 days. October 2008 was when fear returned to Wall Street. A few days ago, the VIX, for the first time in over a year, traded at 20.1.

Disturbing Fact #2: Investors Intelligence (II)

Investors Intelligence (II) tracks buying and selling climaxes on a weekly basis. Buying climaxes take place when a stock makes a 12-month high, but closes the week with a loss. These are a sign of distribution and indicate that stocks are moving from strong hands to weak ones.

According to II, investors who sell into buying climaxes are right about 80 percent of the time after four months.

Last week, II recorded 253 buying climaxes and just 8 selling climaxes.

The first two weeks of October saw 597 buying climaxes and only 41 selling climaxes.

In total, there have been over 900 buying climaxes thus far in October, the most since the October 2007 all-time highs.

Disturbing Fact #3: High Valuations

As a consumer, chances are you’re always looking for the best deal. Why overpay if you can get the same item at a lower price elsewhere, or later on? Who, for example, would still pay the sticker price for a gas guzzling SUV like a Chevy Tahoe or Ford Explorer? Nobody! Even if the car served you well while you owned it, you know that its resale value would be sub-par at best.

If you wouldn’t overpay for a car, why would you overpay for stocks?

Stocks are way overvalued; it just hasn’t sunk in yet. Based on actual reported earnings, the P/E ratio for the S&P 500 is 138. This means that a stock sells for 138 times (x) its actual earnings.

Of course, this is the average for the S&P. Many companies, such as Alcoa, aren’t even in positive earnings territory. The earnings picture today is worse than it was in the year 2000, when dozens of tech companies (XLK) with no earnings saw their stock prices soar into triple digits.

Investors with an affinity for historical data know that the stock market has never reached a true bottom unless P/E ratios (and other common sense valuation metrics) are driven down to rock-bottom readings, also due to falling “P” (prices). Once this valuation reset happens, the market will give a green signal for the next bull market.

The market bottoms of 2002 and March 2009 did not trigger the needed green light. In fact, P/E ratios, dividend yields and two other indicators are pointing towards much lower prices ahead. Indicative of their implications, those indicators have been dubbed the “Four Horsemen.”

The October ETF Profit Strategy Newsletter includes a detailed analysis of the four horsemen along with a target range for the end of this rally and the ultimate market bottom.


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