Irrational Exuberance

Our esteemed and beloved past FED chair, Alan Greenspan, coined the term Irrational Exuberance describing investor’s excessive enthusiasm towards (at the time dot com) stocks, his way of hinting the markets were overvalued. Knowing the markets are driven by investor emotion, not fundamentals we know over or undervalued markets can stay that way for really long periods of time. Eventually when those emotions are driven from investors (or supply/demand dries up) the markets revert.

As such, investor sentiment is a valuable tool to watch.  It’s not the end all be all, rather another tool in the toolbox.  Since there is no perfect way to measure sentiment it’s easy to get wrong signals. This is another reason to reinforce the fact no indicator works all the time except. The only thing that is ALWAYS right is price and why we use indicators as confirmation tools (of price) only.. I have found that in general and with all sentiment gauges, extreme reading are really the only readings that can matter. With that in mind I wanted to show a couple of current sentiment gauges I follow and their current readings. The first is CNNMoney’s fear and greed index. Here is last Thursday’s index reading on the close

To put this into context, here are the readings over the past 3 years.

The fact we are at the highest level in the past 3 years should be concerning as stocks are extremely overextended short term. 

A second sentiment gauge which is the University of Michigan’s consumer sentiment index. Dana Lyons at the Lyon’s Scare combines the sentiment index readings alongside the SP500 index. As you can see this helps put into context the value of extreme readings and their relationship to stock prices. I have included this chart below.  The SP500 price is in the top pane while UofM sentiment index is at the bottom.

 No matter where I look, and however I attempt to rationalize current prices the fact is we are massively overbought and extended. In normal markets and depending upon your investing time frame, these conditions are typically times to lighten up and wait for a pullback to re-enter. Otherwise, the probabilities are you would likely be subjecting yourself to increased risk.  But so far this market has been anything but normal. With seasonality at our back and the fact there are still enough bears that have yet to drink the kook-aid, it looks as if  this market has room to move higher. That is only after we have had a chance to unwind the short term excessive irrational exuberance,

Spending More?

The Wealth Effect – The relationship between personal wealth and consumer spending. According to the wealth effect consumers have a tendency to spend a larger proportion of personal income as their wealth increases. The wealth effect was used to explain increases in consumer spending in the late 1990s when stock prices boomed.

Higher equity prices will boost consumer wealth and help increase confidence, which can spur spending. — Ben Bernanke, 2010.

Household Net Worth continues to rise and like most stock markets, made another new all-time high closing out Q317.

September 2017 Charts on the Move Video

With 3/4 of the year in the books, the US stock market is moving towards a very bullish seasonality period. If nuclear bombs and Washington tweet bombs cant bring it down are we setup for a year-end barnburner? My recap of September can be seen in the video link below.

https://youtu.be/YcmxMQ4ZC-g

Is Another Disappointment Ahead for the Bears?

In Monday’s post about the potential for a correction in the Nasdaq 100 index, I mentioned how some (not all) of the top components of that index don’t look well. In today’s post I wanted to show a few charts to illustrate what I was referring to.

The largest percentage holding in that index is Apple. As you can see, price has broken the 10 month uptrend line, formed a large complex topping pattern and just recently fallen below the important horizontal support. A push higher to regain that level would go a long way towards invalidating the breakdown. Barring that, a continuation of this breakdown targets the area where the 200 day moving average resides.

The 3rd largest component, Amazon looks almost as bad. Like Apple, price has broken below the 10 month uptrend support line and has formed a bigger (and more familiar) topping pattern. Some will immediately recognize the head and shoulders pattern which has not yet validated but is oh so close to doing so.  I have added 3 areas of potential support (T1, T2, T3) below where a pullback would likely find support (buyers) depending upon the strength of the decline.

Finally, the 4th largest component is Alphabet, Google’s parent company. With a similar look to Apple and Amazon but not quite as ominous as price still sits above its 10 month uptrend support line. Just barely though. GOOG, like the first two charts has formed a large topping pattern. If price were to gap lower below the horizontal support line, it will have formed an island top pointing to a decline of 90-100 points below the neckline, or about 20% below its double top high.

I know I keep repeating myself (its not because I am getting old but rather at some point it will matter) but this market has been unbelievably irrepressible and resilient making these warnings unnecessary. Normally investors would be sitting up and taking notice with concern when we see charts like those above, especially when they represent the supposed market leaders. Either way, it should be interesting over the next few weeks to see where the market goes in the short term, if anywhere. Will the bears once again be disappointed or will we see the first decent market correction we have seen in year?  

The First Time in Months

With virtually all major US stock indexes at or approaching all-time highs it may seem blasphemous for me to bring up the possibility of a correction. Especially if I am talking about investors beloved Nasdaq 100 index, the past 2-year sector best performer. But I will risk the hate mail, scud missile threats and worse yet, derogatory White House Tweets to outline what I see may be developing anyway because hey, it’s only a possibility.

As you can see in the daily chart of QQQ, the Nasdaq 100 index, price has formed, the first time in many months, a topping pattern. In this case a rising wedge. Because all corrections (or, gawd forbid, reversals. Remember them?) require a topping pattern, when they do appear (or in development) they should not be ignored. What is likely obvious, the pattern has not confirmed (only 4 touches whereas a minimum 5 is required or broken below support) and could easily be negated if price were to hold above the lower support channel. If on the unlikely chance it does confirm by breaking lower, the pattern’s price target is at T1) below, while just below that is the rising 200 day moving average and immediately below that is an open, unfilled gap, T2.  Any of these are areas of logical support and a place where any pullback (I think I was 12 when the last one occurred), if it were to happen, would find support. It’s also noteworthy to mention the negative RSI momentum divergence in the upper pane.

I know some of you are yawning out of boredom since this “potential” correction is a whopping 5-8% and the sneers of “bring it on big boy” are bubbling from within. But because of its importance to the US stock market, a pullback in this Nasdaq 100 index would likely be the catalyst the overall market uses to do the same. With seasonality still in the bears favor and the charts of some of the top 5 Nasdaq 100 stocks looking rather ill, now is as good a time as any. But not to worry, we are in an uptrend and each and every pullback is being bought. Heck if 2 nuclear blasts and ICBM’s cant rile the market I don’t know what can. Bottom line is any pullback is a buying opportunity as we are setting up for what I expect to be a healthy year-end rally.