Man, do I feel like a mouse on a treadmill. This market is exhausting!
For the past couple of weeks I’ve been telling subscribers to my shorting service Forensic Investor that I was short-term bullish and expecting a bounce in the market. So, I held off on making any new short recommendations.
Still, I’ve been surprised at how far and how fast the stock market has come back. The question is, how much longer will it last?
I discussed this in a recent call we have twice a month among the Dent editors.
After the rally, nearly everyone has turned bearish again. Harry said he would not be surprised if there was another flash crash. And Adam O’Dell’s been focusing on the short side.
I agree with them.
The bounce back that I thought might take several months took just a few days. Many stocks have zoomed 15% to 20% or more.
So this past weekend as I was going through several indicators that I look at each week, I was struck by how much the indicators have reacted. They’re out of control.
Investors Intelligence puts out one that truly shocked me. It’s a short-term trading signal that looks at two-dozen price indicators. The secret sauce isn’t as important as the levels this thing was reading.
It got freaky. On September 29 the indicator was at 5.2 – the lowest of the year. Things were so bad that there was very little downside risk left in stocks.
They almost had to rise from there.
Just eight days later, the level hit 77.6. And that is the highest of all of 2015!
That’s right. It went from its lowest to its highest in a matter of days. That means stocks have risen too far, too fast.
They almost have to go down from here.
That, my friends, is bear market action.
Huge moves back and forth don’t occur in bull markets.
Needless to say, the technical picture doesn’t look good. But it gets better. By that, I mean worse.
We’ve only barely started earnings season, but big companies like Alcoa and Caterpillar are already falling short of expectations. If the leaders are in trouble, then the second tier players are next. They don’t have the financial strength to handle a weakening outlook.
To add a cherry on top, the U.S. market is one of the most expensive in the world. Based on fundamentals, valuations have no reason to be this high. Something’s got to crack.
The bounce came. It happened fast. It’s time to get defensive again.
John Del Vecchio
Editor, Forensic Investor