|Have the US markets peaked out?
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The Dow fell 173 points yesterday, after being down more than 300 during the day. Press reports told us that investors were worried about weak consumer sales and poor producer prices. Those, combined with low oil prices, make it look like a European style slump is coming to the whole world.
But what did you expect? It is autumn. The days dwindle down...life closes in on you.
It comes as a shock. Like when you turn 60; you suddenly realize that you are...alas...mortal. You will not make an infinite amount of money in your life; in fact, you've already made most of what you're likely to make. You will not drink an infinite number of martinis...or have an infinite number of friends...or hear an infinite number of concerts. Au contraire, the numbers in your life are limited...and probably already undergoing some shrinkage. Your height. Your savings. The years left to you... the number of times you'll get sick or fall down drunk.
They're all getting smaller. Then, you have to think more carefully about what you're going to do with the numbers you've got left.
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Bull markets are not unlimited either. They have life cycles. Their days are numbered even before they begin. And if this is not the beginning of the end for this one...then, it must be the end of the beginning. The bear market waits...bides his time...and wonders how many desperate souls he will take down with him. Investors check their portfolios and wonder what to do with the money they've got left.
A single day does not a bear market make. But the closer you look at the US stock market, the worse it looks.
First, it is simply over-priced. Ned Davis Research puts the cyclically adjusted price/earnings ratio of the US market at 23 - well over our limit of 20. Mebane Faber calculates it differently and comes up with 25. Star (another cyclically adjusted p/e ratio) has it as 26.
By way of comparison, that makes US stocks about twice as expensive as shares in England, for example. The UK's ratio is only about 12.
And compared to Russia, US stocks are 4 to 5 times more expensive, per dollar in earnings. Russia's CAPE is only 5.
If you knew nothing else (which is about what we do know) you could conclude that US stocks are high and Russian stocks are low. And if we followed the simplest, oldest, and surest rule in the investment world we would be out of the US and into Russia.
'Buy low, sell high.' What could be clearer?
And what's this? The mighty US stock market is suddenly looking weak and vulnerable. Here's MarketWatch:
In nontechnical terms, the October 8th manic rally was a head fake. It might have cheered amateur investors, but in reality, this has become one of the most dangerous markets since 2008.
Yes, dear reader, the bear market may have arrived. Or not. But it will come.
Facts are hard to dispute but easy to spin. Already, the Russell 2000 RUT, -1.37% is in a 10% correction. Judging by history, the Dow Jones Industrial Average DJIA, -0.69% and S&P 500 SPX, -1.15% shouldn't be far behind. A major correction or crash would be definitive proof this market is wearing no clothes.
Failed rallies are extremely significant. Previously, whenever there were major or minor selloffs, buy-on-the-dippers would come in and change the market's direction. On a chart, you'd see a distinctive "V" pattern as buyers overwhelmed sellers. This pattern has continued for months - until recently.
On the market's worst days, the Fed would conveniently appear with a new QE program or a promise to keep interest rates low for a considerable time (that's getting old). Soon, though, these bandages will not work. Failed rallies mean the party is almost over and a bear market is getting closer (and may even have arrived).
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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