Wednesday, 7 October, 2009

Top 10 Signs that the Market Could Be "Topping"

Top 10 Signs that the Market Could Be "Topping"

Got a wonderful piece about the US markets in a mail from one of the e-groups that I'm a member of. I've reproduced the same at the bottom of this post. Don't know about the original author. Due credits to the good soul.

What's the relevance for us in India? Some pointers:

  • Index PE Ratio is over 23 - Implying that
    1. Either the market should be topping out soon or
    2. There must be significant earning upgrades among index heavyweights or
    3. There must be a mother of all bubbles or
    4. There must be a huge scam pushing up share prices
  • Many, if not most of the big guns have missed out the rally from March 2009 - Implying that
    1. Every dip will be bought into, quite eagerly - Nobody wants to miss the bus again
    2. If crucial technical levels are breached on the downside, there will be utter chaos, with everyone wanting to sell out all at once
    3. All possible good news appears to have been built into prices - However, any significant negative surprises have apparently not been taken into account. Hence, a sudden downward pressure on share prices can be quite nasty. See what happened to telecom stocks!

What should We be doing at this juncture?

  • Each of us should re-visit our Asset Allocation and stick to the same in a disciplined manner
  • We should analyse our own risk profile and decide the extent to which
    1. We'll participate in the ever-accelerating F1 race going straight uphill towards Suicide Point and
    2. We'll attempt to catch falling knives as and when the knives start falling.
  • To the extent we can, we must keep the gun powder ready - Start accumulating lots of cash from your Long-Term Equity Portfolio, with the conviction that
    • You'll never be able to catch the absolute Top
    • You'll be in a position to grab a whole lot of quality stocks at much more attractive valuations a few days / weeks / months down the road.

Standard word of caution: While I continue to remain invested in several shares as part of my long-term portfolio, I'm constantly increasing my cash levels with every few percentage point increases in the Nifty levels. Obviously, I'm trying to gather enough gun powder. 

Happy investing!



Top 10 Signs the Market Could Be "Topping"

/By Justin Ford, Executive Editor/

Let´s get right to it. Drum roll, please...

*# 10) Irrational Exuberance gives way to Incomprehensible Elation.* In
the midst of the worst recession since the great depression, on the
heels of a 50% stock rally in six months and just before a new major
wave of housing foreclosures and a likely commercial real estate bust...
Wall Street is selling stocks like there´s no tomorrow. A screen of
5,817 actively screened stocks yields just 154 with a "sell" rating.
That´s one out of 38. At the height of the tech boom, it was one out of 29.
# 9) The "Invisible Bailout" reaches record levels.* This is the bailout
no one´s talking about-executives bailing out of their company´s shares!
Trim Tabs reports the highest level of insider selling since they began
keeping records in 2004, with insiders dumping $105 billion of stock
during the rally. That´s 31 times greater than the pace of insider
buying. This is almost the exact opposite of Wall Street´s sell-rating
ratio. Well, the sharks have to sell to someone, and brokers appear to
be lining up the minnows to take the CEO´s shares off their hands.

*# 8) Ugly is beautiful and bad is good.* Excessive credit caused the
crisis we´re in but you wouldn´t know it by looking at the stock market.
A recent survey of public companies showed those /with the worst credit
ratings/ have led the rally-soaring 89% while the S&P 500 rose 53%.

*# 7) The Rally is long in the tooth. *We´ve had greater rallies than
the current one but not longer ones-at least not after major crashes.
The longest rally during the 1929-32 bear market was 155 days. We are on
day 204 of the current rally.

*# 6) A New Wave of Housing Foreclosures will begin in the 4th quarter.*
Loan modification plans have been largely ineffective because banks have
been stingy and loan servicers don´t have the authority to modify many
of their loans. Consequently, many foreclosures that have been postponed
until now, will be postponed no longer. They´re going to happen. And
there are quite a few of them. Mortgage companies hold 1.2 million loans
on which they haven´t received a payment in 90 days, another 1.5 million
that are "seriously delinquent," and 217,000 that haven´t received a
payment in over a year. In all, 3 million new foreclosures could come on
the market in the next year, further depressing real estate prices. A
big chunk of those could happen in the next few months. "We are going to
see a spike from now to the end of the year in foreclosures as we take
people out of the running," a Bank of Ame rica spokeswoman told /The
Wall Street Journal /last week.

*# 5) Dirt-cheap mortgage money may come to an end soon. *If you can get
a mortgage today, the money is as cheap as it´s ever been-about 5% for a
30-year fixed-rate loan. But that may not last long. The Fed has bought
80% of the Freddie Mac and Fannie Mae mortgages since the crisis began.
Private investors still aren´t interested. What´s more, the Fed´s $1.25
trillion program for buying these mortgages is two-thirds done and
scheduled to finish at the end of the year. If the government doesn´t
incur more debt to buy this debt, rates will rise and put a further
kibosh on the decimated housing market. And all these housing woes don´t
even count the considerable trouble brewing in the commercial real
estate sector...

*# 4) The Crisis in Commercial Real Estate is just beginning.
*Delinquencies on commercial real estate loans recently rose above 3%.
That´s more than six times the level of a year ago, but it´s likely only
the beginning. Double-digit unemployment and a chastened consumer's are
causing office and retail vacancy rates to rise and rents to plummet.
Making matters worse, most lenders finance commercial properties with
balloon loans. These are typically due in full after just five, seven or
ten years, and loose-money loans originated in ´05 and ´06 are now
coming due. Yet since values are falling many commercial property owners
will not be able to refinance. The problem is widespread too since
commercial real estate loans are usually the bread and butter of local
banks. Only ten major banks made up the bulk of the housing lending
market. Yet, according to /The Wall Street Journal/, more than 3, 000
banks and savings institutions have more than 300% of their risk-based
capital in commercial real-estate loans. And almost $100 billion of
their loans coming due in the next three years may have difficulty
getting new financing.

*# 3) The Consumer isn´t coming to the rescue, as hoped. *Consumption is
the biggest component of the U.S. economy-but getting smaller.
Unemployment is at 10% by official figures (over 20% according to Shadow
Stats); there are six job hunters for every job opening and 52% of job
hunters say they´re exhausting benefits before they find that next job.
Credit card delinquencies are up 60% and 7.6% of all U.S. households
were late on their mortgage last month!

*# 2) October is a scary month.* OK, there´s nothing very scientific
about this one, but October is the month for Halloween and major market
crashes. Past Octobers have seen intra-month plunges of 41% in 1929; 39%
in 1987; and 29% last year. As we enter month seven of a record rally,
this odd piece of history may replay yet again.

/And the # 1 reason the market could be topping.../

*1) The # 1 Predictor of Collapsing Share Prices just issued its first
sell signal in 226 days.* The predictor is The Credit Crunch Short
Indicator. It consists of four criteria that appear very rarely together
in any one stock. The first identifies a company that is going through a
credit crunch. The second and third confirm the situation is getting
worse. The fourth indicates the credit problems are beginning to show up
in the share price.

The one problem with the indicator is that it is /extremely/ selective.
It doesn´t tell you when to short an index or a mutual fund or ETF. And
it doesn´t try to catch all falling stocks. It only targets the ones
that are the "weakest links" financially.

But when it triggers, it has proven to be very accurate. And when it
doesn´t find easy pickings, it´s as silent as a church mouse. In fact,
during the recent bull market rally the Credit Crunch Short Indicator
didn´t issue a single sell signal in over seven months. After averaging
over two a month covering nearly a three-year period, it went dead
silent. Until last week.

Then, like a reliable old boiler kicking on again the first cold day of
winter, it revved up and spit out a brand new sell signal. And then
another. Both those stocks are down double digits in less than a week
and the recommended put options on them could realistically deliver
profits of 60% to 100%-plus by the end of the month. Even more telling,
there are now over a half-dozen stocks on the Credit Crunch Short
Indicator´s "Watch List."

Two months ago, during the height of the rally there were none. But now
seven are "knocking on the door" with three criteria for shorting
confirmed and only a few points away from a possible 4th criterion and
another "sell signal."

The point is that when the most selective indicator we´ve ever seen
begins to issue sell signals, it is another good reason to keep an eye
on the exits and take action to protect your capital and possibly even
make significant profits in the next market correction.

In itself, a 50%+ rally in just over six months should be enough to give
even the most bullish investors pause. But combined with other
unpleasant news on the horizon and the sudden "talkativeness" of one of
the market´s most selective indicators... it all leads me to believe it´s
time to take some defensive action.

What´s that mean?

* Buy gold if you haven´t already. It could be an ETF like GLD or
bullion if you prefer to own it physically. If a market correction
turns into a panic even for a little while, you could see gold and
silver rise smartly. And if it´s a dull steady decline, gold tends
to hold when paper assets fold.

* Consider picking up shares of the VXX, an exchange traded note
(ETN) tracking the VIX volatility index. Volatility has decreased
sharply during the market rally. In any sharp correction, it is
likely to spike. In the first quarter of this year the VXX spiked
to as high as 120. A move to just half that would represent almost
a 25% gain from current levels.

* Set stop losses on your long positions. It could be 20% or 25%.
They could be market stops or mental stops (which makes you
responsible for placing the sell order when the shares drop 25%
from their high). Either way, pay attention to your stocks,
especially in broad market declines and stick to your strategy for
protecting gains and preserving capital.

* Look for opportunities to make money on the short side, profiting
from falling share prices by targeting the most financially
vulnerable companies, /waiting for technical price confirmation/
before placing your trade, and again-having a stop loss in place.

They say an ounce of prevention is worth a pound of cure. It´s time to
take a few ounces.

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