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A day after confidence data ripped to 16-year highs, taking stocks along for the ride, some are asking if investors have gotten a little too spirited away.
“Barely one day on, and we find ourselves on the opposite end of the spectrum, where traders are scrambling over each other to buy this dip,” observed Cracked Market’s Jani Ziedins in a blog post.
That brings us to our call of the day from JonesTradings’s chief market strategist Michael O’Rourke, who senses trouble in a disconnect between soft data (consumer confidence, PMIs) and the hard stuff (GDP inflation, jobless levels).
The softer numbers have been “stronger than the hard data throughout the entire recovery,” a divergence that has deepened since the election, longtime bear O’Rourke told clients in a note.
He then turns to one component of the confidence data, the “Expectation of Stock Price Increases,” which hit 47.4 in March. That’s the second highest reading on record in nearly three decades, beaten only by a January 2000 reading of 47.7.
O’Rourke says while it’s hard to say “today’s euphoric sentiment, matched only by the equity bubble in 2000, is a clear market signal,” he does point out some troubling historical markers.
March marks the fourth straight month of readings above 45 for that index, the longest streak on record. You have to go back to spring 1998, just before the Russian Debt Crisis and failure of hedge-fund firm Long Term Capital Management, for anything near that — a three-month run at those heights. And two straight readings above 45 preceded the 1987 crash, notes O’Rourke.
The first reading above 45 typically is followed by a 1.2% loss for the S&P within the next three months, and a 3% loss in the next six months, according to the data.
Given the S&P is up 5.35% year to date, it’s unlikely the index will deliver that kind of loss by June, but the expectations streak is “yet another warning sign flashing the high level of risk in this market,” O’Rourke says.
Back to Cracked Market’s Ziedins, who believes investors are facing a stock conundrum: “I want to trade, but at the moment the upside momentum is too strong to short, and this rebound too fragile to buy,” he says. Wait for the rebound to fizzle.
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Get out of this market too fast and you miss out on gains, Bank of America Merrill Lynn strategist Savita Subramanian recently told clients. But piling in at the last minute isn’t such a great idea either, she warned.
Below is her chart showing gains for the S&P 500 just ahead of a market peak, going back to 1937. It reveals that returns at the last year of a market cycle make up a disproportionate chunk of returns from the entire cycle.
Read more on why long-term stock returns look so gloomy, from MarketWatch’s Anora Mahmudova, as well as some tips on where investors should divert to instead of going the whole hog on U.S. stocks.
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