U.S. Stock Market - March 15th Week In Review

On December 5^th, 1996, Federal Reserve Chairman Alan Greenspan made a memorable speech at the American Enterprise Institute. The single most famous paragraph in this speech was the following:

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

The Dow Jones Industrial Average, which had been trading around 6,400 at the time of the speech, fell to near 6,200 over the next 8 trading days before buyers regained the upper hand in one of the strongest decades for U.S. stocks on record. The DJIA would not top out until January 2000 when the “dot com” peak was made at 11,908. Any investor who sold in early December 1996 when Dr. Greenspan intimated that U.S. stocks were overvalued lost out on capital appreciation of +86% (not including dividends).

The same Alan Greenspan reappeared again late last week (perhaps like a bad penny?). In an interview on CNBC’s Squawk Box, Dr. Greenspan said that he doesn’t see any “irrational exuberance” in today’s stock market. In fact, Greenspan said that [equity] markets are “significantly undervalued” now despite the fact that most major U.S. stock market indexes are trading at all-time record highs.

Does anyone hear a bell?

Here are Friday’s closing marks, with changes from Thursday’s close, and also with changes on the week, respectively:

                                                                  Friday’s Change                   Weekly Change

Dow Jones Industrial Average     14,514.11     -25.03       -0.17%       +117.04        +0.81%

S&P 500 Index                             1,560.70       -  2.53       -0.16%       +  33.00       +0.61%

NASDAQ Composite Index          3,249.07      -  9.86        -0.30%       +  77.56      +0.41%

Russell 2000 Index                       952.48         -  0.59        -0.06%       +  27.75       +1.06%

A 10-day winning streak in the DJIA was broken on Friday, as U.S. equity prices declined in part on a report from Thomson Reuters at its University of Michigan preliminary sentiment index for March fell to 71.8 from 77.6 in February. This widely-followed gauge was projected to increase to 78, according to the median estimate of 67 economists surveyed by Bloomberg. However, over the course of last week, most economic reports were “market friendly” to stocks. Investor confidence is clearly upbeat as measured by the latest weekly sentiment surveys which show relatively high levels of “bullishness” (Consensus Index at 76% Bulls, Market Vane at 69% Bulls, as posted in Barron’s Magazine). With the VIX Index (a.k.a. "Fear Index") now at a historically low level of 11.30 and most sentiment gauges reflecting very high levels of bullishness among often wrong investor groups, perhaps there is just too much complacency now?

When I wrote the Sutton Advisory Letter on a daily basis between 1988 through 1998, I read a research report concerning the performance of the U.S. stock market when the President leaves the country. Unfortunately, I can not find this report now, but I distinctly remember that the numbers were negative (and statistically significant). President Obama AND Vice President Biden will BOTH be out of the country next week, and they may actually be away on the same day (at least for a few hours). President Obama leaves on Tuesday night on a trip to Israel, the West Bank and Jordan. Earlier on Tuesday, Vice President Biden will be attending ceremonies in Rome surrounding the installation of new Pope Francis. What is uncertain is whether VP Biden will be back in the United States by the time President Obama departs on his trip. His official schedule has not been released.  This is just one more worry that investors will have to deal with early this coming week.

Bottom Line: While I remain negative on the U.S. stock market, I don’t think bearish traders can take much of a victory away from Friday’s price action where the DJIA’s 10-day winning streak was broken and the S&P 500 Index fell just 0.16%. As mentioned in my Thursday column (3/14), there are some interesting “cracks” starting to appear in the foundation of this extraordinary bullish advance. Within my computer trading system, Weekly chart sell signals were triggered late last week in Amazon, Salesforce.com, Costco, and the U.S. Dollar Index (DXY). I would like to see some sort of “blow off” top that triggers a sell signal in my computer system before declaring an official end to this advance. Unfortunately, I have a strong hunch that this next inflection point won’t be marked by a buying stampede or “investor capitulation” that is sometimes seen at major tops. Looking ahead to this week, there is a Federal Reserve meeting of its Open Market Committee (FOMC) this coming Tuesday & Wednesday with a policy announcement scheduled for Wednesday, March 20^th at 2:00 PM ET. This type of announcement usually includes brief comments on the Fed’s views of the economy and also how many FOMC members actually voted for and how many voted against the latest policy decision. I suspect that at least some major investment managers in the U.S. stock market may begin to lighten their long positions going into this announcement, especially given recent reports that there may be a growing divide at the Federal Reserve regarding its current accommodative monetary policies. Maybe Wednesday's Fed announcement will be THE catalyst which triggers the next major correction in the stock market?

Dow Jones Industrial Average with Computer-generated Buy & Sell Signals