Worth Reading 5.25.14

One of my favorite websites is Advisor Perspective’s dshort.com from which all of the following recent May articles originated. They are all worth a quick read.

“Bulls Gaining Ground” presents a balanced bullish argument for the near future of the stock market.

“How Long is Long Term” is a good overview of how returns historically occur in the stock market in contrast to the perceptions of most and why returns in the future may disappoint.

“Corporate Profits and Market Crashes” explores what I believe is one of the most important issues in the current stock market in regards to the ominous implications of current record corporate profits.

“Economic Recovery Analysis” explores negative characteristics of the current economic recovery, which I believe strengthen the case that this secular bear market is unfortunately not yet over.

Worth Reading 5.13.14

Following is a collection of recent articles, mostly on the topic of stock market risk, worth a read….

The Last Two Times this Happened the Stock Market Crashed

Third Time a Charm?

Secular Bull and Bear Markets

It’s Only Like This, Until It’s Like That

Listen to the Market

I.C. Angles Investment Post…

A good stock market analyst looks for reasons a rising market could fall and a falling market could rise. On that note I have found and written about many reasons why this bull market could reverse. I have even gone so far as to declare risks of a bear market are rising. And I believe stock market returns over the next 3-5 years are likely to be poor. But I have not declared a bear market imminent or urged adopting a defensive portfolio posture. The reason for that is simple. I have been listening to this market and so far it has been saying stocks will keep rising. That might be changing as the market struggles to make meaningful gains since the Fed announced its exit from QE. But so far the benefit of doubt needs to be given to the bulls, as this market has managed to make higher highs. The price action remains positive, and buyers have been stepping in where they should to keep it that way.

Three Warning Signs

I.C. Angles Investment Post…

As the stock market struggles to make new highs, investors are increasingly complacent despite worrisome developments. Yet, the U.S. stock market itself is looking increasingly shaky. Worrisome signs are also growing around the U.S. housing sector critical to America’s economy and China’s economy, which has been an engine of growth for the global economy. Although the price action of this stock market remains healthy enough to justify holding a substantial amount of stocks in a long-term portfolio, this does not justify complacency or in my view significant stock exposure for investors with shorter-term time horizons, particularly in light of growing bearish signs.

Reading on the Unwinding Carry Trade

I.C. Angles Investment Post…

After testing its 125-day moving average the stock market has gone on to eek out a new high in February. My own views remain unchanged and I continue to be concerned about several issues, including monetary policy and associated malinvestments, particularly in China, which pose significant risks to the global economy. On that note Zero Hedge recently ran an article well worth a read that contained a lengthy excerpt from Bank of America Merrill Lynch Global Research, focusing on these very topics that I have been blogging about for some time, with data I have not presented before. For those inclined on learning more about implications of the global carry trade that links Fed money creation with Chinese bad debt here is a quick link to “The Pig in the Python is about to be Expelled.” Although a good read my own opinion does differ somewhat in that I don’t believe tapering or continuing to push money into Chinese credit markets is a matter of choice, as postulated. Per my October post on China “The Clock is Ticking” arguing that Chinese return on capital is deteriorating to the point where it no longer generates growth, as well as my earlier commentary on the Fed, including “The Party is Over“, where I have commented that monetary policy is similarly realizing diminishing or even negative returns, I believe a reversal in economic fortune is now a matter of time, regardless of the monetary choices made.

A Scarier Looking Market

I.C. Angles Investment Post…

Unwilling to yet call a bear market, I have nevertheless become increasingly negative on this bull market. But despite a rough January, the stock market, as measured by the S&P 500, remains above its 125-day moving average—a level it has held for over a year. As such it would still be premature to call the current bull market over. But it’s not too early to examine why a meaningful move down with a breach of important technical levels, such as the 125-day, will be a reason to adopt a defensive posture, rather than “buy the dip” as so many are already advocating. In the spirit of my first “A Scary Looking Market” post I’ve included some new charts that argue against many of the currently popular bullish arguments. There is good reason to believe that optimism for the ability of the Federal Reserve through monetary policy to engineer strong economic growth is misplaced. Also unlikely to be realized is the hope that stock price multiples will grow further in a Great Rotation of investors moving from cash and bonds into stocks.

Fear of Heights

I.C. Angles Investment Post…

As the stock market makes new highs, there are many reasons to worry that the fall could be particularly hard when it comes. I’m no permabear and have not been constantly arguing a bear market is around the corner. Even if I haven’t been the biggest cheerleader of stocks I have been an advocate. For example in August of 2011 I wrote about how, despite negatives, stocks were the best investment options available to most and in my February post this year I argued that despite rising risks investors should continue to hold stocks and a decline was unlikely to transpire until 2014. At the same time, starting in May of this year, as the stock market kept making new highs, I began to argue that risks in 2013 were rising and investors should use the strength to raise cash levels and sell some stocks, particularly money involving a low risk threshold and time horizon. As I look at where the stock market stands at the end of the year, I continue to believe the risks of a bear market being sooner rather than later have only grown.

Exit Signs

I.C. Angles Investment Post…

Investors are pouring money into the stock market. As the market makes new highs, they’re on track to allocate the most money into stocks since 2000, right before that market rolled into a bear market. The so-called dumb money is often late to the party, as most investors buy at highs and sell at lows. Dumb money rushing into stocks is just one more bearish sign in this almost five-year old stock market. But as many short sellers have found, as this market keeps making new highs, famous economist John Maynard Keynes was right when he proclaimed the market can stay irrational longer than you can stay solvent. Bears actively betting against this market are getting killed. No matter how negative the fundamentals, betting against a trend is a good way to go broke. So, now might be a good time to consider what signs will indicate the current bullish trend has reversed, and the time has arrived to head for the exits.

The Clock is Ticking

I.C. Angles Investment Post…

While market watchers fixated on the debt ceiling in the United States, as the clock for raising the ceiling was again reset by Congress, debt issues in China likely pose a more significant threat to the global economy. It’s a risk not lost on Chinese policymakers, who are adopting new practices in order to wean their economy off dept dependence before the worst happens. But with the current levels of debt, economic imbalances and perhaps most importantly high debt inefficiency that clock is ticking. And unlike the U.S. Congress’ debt clock, this Chinese one is not going to be reset by a simple vote of politicians to borrow more. It is imbalances such as these not so easily addressed that pose the real threat to the stock market.

A Scary Looking Market

I.C. Angles Investment Post…

This bull market increasingly looks scary. Setting new record highs and extending deep into 2013 only makes it look more worrisome. It was only a little more than a year ago I recommended investors keep stocks as the largest portion of any long-term investment portfolio. But that advice came with the caveat that market risk would rise in 2013, and indeed I have become increasingly nervous about stocks this year. Although I have yet to declare a market top, and will not call a bear market until important technical levels are broken, I have not hesitated urging taking profits and raising cash levels by selling stocks as this market has set new record highs this year. Pictures can often convey more than words, and in this post I am going to highlight a few notable and scary charts related to the current stock market.