It was another low-volume/uneventful day yesterday...until about 2:30, when the stock market rallied strongly over the last hour and half. When you combine the 12 point gain in the S&P 500 this morning with the 20 point gain the futures are indicating this morning, you put the S&P less than 2% from its February all-time highs. With the Federal Reserve providing a safety net, it is very tough to think that the stock market can see a substantial decline from here. We agree that a severe decline is very unlikely, but there is no question that the action in the market is eerily reminiscent of what took place in 2000 and 2007. In both of those years...a record breaking, but overvalued stock market saw a correction...that was followed by a retest of the old highs in the August/September time-frame. Then it rolled over and began a savage bear market.
Of course, there are differences this time (like there always are). The initial “correction” was MUCH deeper this time around. However, as we mentioned above, the biggest difference is that the Fed is already providing liquidity to the market place. Even though they have throttled-back on this stimulus significantly over the past two months, they still remain ready and willing to provide “whatever it takes” if/when it is needed. Therefore, the odds that we’ll see another debilitating bear market begin over the next few months are very low.
However, this does not mean that we cannot have a meaningful pull-back...or even a full-blown correction of 10% (or a bit more) over the coming weeks. As we have highlighted ad nauseam recently, there are plenty of signs of froth in the market place...with last week’s action in Kodak leading the way. However, there are other signals in other stocks...even from the stocks of companies that have a great fundamental outlook. Last week, we highlighted Taiwan Semiconductor’s move as excessive. Even though they got good news on their earnings...and from the news on INTC...a 23% gain over two days showed that there is at least some froth in this name. A 25% gain...after it had already rallied 60% over the previous four months...which had taken its forward P/E ratio 50% above anything it has seen in years...shows that the stock is getting well ahead of itself over the near-term.
The same thing can be said about AAPL. Yes, they did report very good earnings. However, it’s not like they just introduced a big new product. When a stock like AAPL...which had already rallied 71% over the previous four months...rallies another 18% over just seven trading days...merely on better-than-expected earnings...it’s a sign of froth...PERIOD. In other words, it would be one thing if the stock had been clobbered recently. If it was deeply oversold, then a positive earnings report (even without some sort of new product announcement) would indeed be normal. However, when a stock has seen a big rally...and has become overbought...an 18% rally on the mere report that they had a better quarter is a sign of froth.
We realize that few people will agree with us. Most will say that the numbers for AAPL were SO good that the massive (further) rally was justified. We disagree...and we believe that this name (and some other mega-cap techs) have become ripe for a meaningful pull-back. We are NOT saying that the bull markets in these names is over. We’re just saying that they are due for a material pull-back very soon...and thus investors should be careful about chasing the mega-cap tech names on a short-term basis (the next few weeks).
Away from the tech stocks, we also believe that gold is becoming ripe for a pull-back as well.......We have been VERY bullish on gold for some time now. We were VERY bullish on the yellow metal when it broke above $1,550 at the beginning of this year. In April, we then said it would take a “breather”. Sure enough, it traded in a sideways range over the next 2.5 months. Then...when it broke above $1,750...we pounded the table once again...saying gold would see a rally to 2011 record highs very, very quickly. This is exactly what took place.
However when gold reached $2,000 earlier this week, we started to become less enthusiastic about the commodity...and now that it has rallied towards $2,050, we believe it has become ripe for a pull-back......First of all, the RSI chart on gold has risen above 88. You have to go all the way back to 1999 to see a more extreme reading on its short-term (daily) RSI chart. On top of this, the DSI data shows that bullishness in gold for the futures traders has reached 93%...and its 5-day average is up to 90%. In other words, gold has become extremely overbought and extremely over-loved on a short-term basis. We remain very bullish on gold over the intermediate and long-term, but based on these readings (and all of the positive press that gold is now getting) we believe that it has become ripe for a pull-back. Therefore, investors should look for lower prices to add to positions...and traders should take some profits up at these levels.(Third chart below.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.