U.S. Stock Market - Sell in April and Go Away!

Stock market traders seem to have a saying for every type of market. "Never sell a dull market!", "The trend is your friend!", and "Don't fight the Fed!" are some of the more popular, but there are dozens of other primary examples. One that immediately comes to mind is "Sell in May and go away!". Of course, this hasn't really worked over the last few years, but stock market returns over the longer term seem to suggest a fairly significant under-performance from May through October as compared to more positive results from November through April. 

So why is the title of this column "Sell in April and Go Away"? The answer is simple. Just like the so-called "January Effect" favoring small-cap stocks now begins in early December, so too will the under-performing 6-month period that used to begin in May now begin in April.

The Nasdaq Composite Index was down 2.83% last week and the Russell 2000 Index lost 3.53%. The Biotech sector fared even worse, with the most popular Biotech ETF down 6.38% last week. This same index is now down 17.50% for the month of March so far (see monthly bar chart below). The S&P 500 Index only lost about 0.50% last week, but this relative "safety" and out-performance in the big-cap stocks will soon prove temporary in my view.

While the potential negatives for stocks are mounting with each passing day (Ukraine/Russia, China debt bubble, European economic woes, ditto in Japan, liquidity concerns resulting from the apparent change in monetary policy by the Federal Reserve (tightening bias?), near record valuations for U.S. stocks, and  corporate earnings forecasts that appear overly optimistic), let's add another relatively small, but important, potential negative. Michael Lewis (of Moneyball and Liar's Poker fame) has just written a new book called Flash Boys. It's about high-frequency trading (HFT), and Michael Lewis concludes that HFT is bad for regular investors. He even goes as far as to say that the stock market is now a "rigged game". Maybe so, but my reason for highlighting this comment from Lewis is that disillusion is beginning to take hold and I now believe that investors will soon begin to exit stocks en mass. It's already begun in the so-called high flyers and also many small-cap and biotech shares.

On Sunday, March 9th in this column, I published a list of the 25 Most Overvalued Stocks as of the March 7th close. Here is that same list with updates on the share prices of each as of Friday's close, March 28th (3 weeks from March 7th).

25 Most Overvalued Stocks (March 7th, 2014 through March 28th, 2014)

The average stock on this list is now down -14.21% over the last three weeks and -20.44% from their respective individual highs for the year thus far in 2014.

A major correction in the U.S. stock market is already underway!

Here are four interesting charts for your review (all with key sell signals as triggered by my computer trading program):

1. Biotech ETF Monthly Bar Chart

2. Dow Jones Industrial Average Weekly Bar Chart

3. Dow Jones Transportation Average Weekly Bar Chart

4. Russell 2000 Index Weekly Bar Chart

U.S. Stock Market - Candy "Crushed"; The KING is Dead!

The initial public offering (IPO) of King Digital Entertainment (symbol KING) debuted today at $22.50/share and then promptly plunged to an intra-day low at $18.90 before ending the day at $19.00/share, down 15.56% from its IPO price. 

The KING is dead! My view is that this stock will never see its IPO price again. Best case here is that KING falls 50% before finding significant support (along the lines of the FaceBook IPO in its early stages of public trading).

Here are just a few noteworthy items from the financial landscape today:

1. Citigroup failed its "stress test". According to the Federal Reserve, “While Citigroup has made considerable progress in improving its general risk-management and control practices over the past several years, its 2014 capital plan reflected a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there was not sufficient improvement”. Citi's stock (symbol C) is down 5.2% in after-hours trade this afternoon.

2. The so-called "Fab Five" tech stocks (TSLA -19.62%, FB -16.82%, GOOG -7.74%, PCLN -13.78%, and NFLX -18.75%) are now down on average -15.34% from their all-time highs as posted over the past three weeks to today's NY close.

3. Almost every member of the Federal Reserve Board (both voting and non-voting members) has reaffirmed the Fed's so-called "taper" plans and they even have indicated that the current "zero interest rate policy" (ZIRP) may end as early as the spring of next year. As mentioned previously in this column, I strongly believe that most Wall Street analysts and investors have underestimated the potential negative ramifications from this apparent MAJOR change in Fed policy. I see a nasty liquidity crisis on the immediate horizon, and it may in fact have already begun!

4. Today's "inside out" trading day triggered the following daily chart sell signals within my computer trading system: SPX, SPY, OEX DIA, DJUA, OIH, BKX, TXX, SOX.

5. A daily chart buy signal was triggered today in the VIX (index option implied volatility, of course). The VIX ended today at just under 15. To me, this number is incredibly low given the potential downside risk to common stocks right now. For those of you who may not know much about the Crash of 1987 (October 19th), the implied volatility in most OEX put options exceeded 250 on that day (that's NOT a misprint, I can assure you). Could a crash like the one that unfolded in 1987 happen again? I am sure it's possible, but the Federal Reserve hasn't been shy about providing support for financial asset prices over the last five years on any meaningful correction. While I firmly believe that a 20% correction from recent high ground is almost a sure bet right now, it's not hard to imagine that the Fed will be there at that point with a strong effort to stabilize the markets. Of course, if the Ukraine situation gets out-of-hand or if China has a "Lehman" moment, then the resulting panic could slice through any Fed support actions like a hot knife through butter.

I have offered just a few very interesting charts below, all with the latest signals from my computer trading system automatically reflected as of today's close of trading:

1. Monthly Chart SELL signals in Netflix (NFLX), Toll Brothers (TOL), and Amazon (AMZN)

2. Weekly Chart SELL signals in CSX and PCAR (key transportation stocks)

3. Daily Chart SELL signals in the popular SPY and the DIA ETF's

U.S. Stock Market - Daily Chart Sell Signals at Friday's Close March 21st

Just a quick note today.

Daily Chart Sell Signals were triggered within my computer trading system at Friday's NY Close (March 21st) in the following major indexes and ETF's:

1. S&P 500 Index
2. S&P 500 ETF (SPY)
3. Dow Jones Industrial Average
4. Nasdaq Composite Index
5. Nasdaq 100 Index (NDX)
6. S&P 100 Index (OEX)
7. Russell 2000 Index

Attached below is the Daily Bar Chart for the S&P 500 ETF (symbol SPY), with all the latest computer-generated buy and sell signals.

S&P 500 ETF (symbol SPY) with Computer-generated Buy & Sell Signals

U.S. Stock Market - Five Year Bull Run Is Done!

Depending upon which index you follow, the last major U.S. stock market bottom was posted between March 10th and March 24th, 2009. For all intents and purposes, the five year anniversary of this sentinel event is therefore NOW. And with mutual fund 5-year investment returns now at their absolute best, it's not hard to understand why Main Street investors have been pouring their hard-earned savings into stock funds over the past year. Of course, let's please not forget that these same investors were exiting stock mutual funds month after month for almost four years in a row before last year (the final year of this bull market).

Bottom Line: The 5-year Bull Market in the U.S. Stock Market is over! A new bear market is now underway, and traders and investors can expect at least a 20% decline over the next 6 to 12 months.

Mark Hulbert, who is best known for his market newsletter ratings, published an excellent research note in today's "weekend" Wall Street Journal edition about the record pace of corporate insider selling in the U.S. stock market. Hulbert's column today discusses the latest research from Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider trading behavior. Professor Seyhun has found a unique way to analyze the raw insider trading information and his conclusion bears attention. He strips out the largest shareholders from the sell-to-buy ratio, and that new adjusted figure shows the current record level of insider bearishness right now. According to his calculations, corporate officers and directors in recent weeks have sold an average of six shares of their company's stock for every one that they bought. That's more than double the average adjusted ratio since 1990, when Professor Seyhun's data begin. One year ago, Professor's Seyhun's adjusted ratio was solidly in the bullish zone, he says. The current message of the insider data "is as pessimistic as I've ever seen over the last 25 years," he says. What makes this development so ominous, he adds, is that, while no indicator is perfect, Professor Seyhun's research has shown that "the adjusted insider ratio does a better job predicting year-ahead returns than almost all of the better-known indicators that are popular on Wall Street."

And what's all this talk about "Income Inequality" lately? You can't listen to any news media outlet recently without hearing at least one reference to "income inequality" from newscasters, columnists, the Obama Administration or leading Democrats on the Hill. If ever there was a threat to corporate profits and margins, THIS IS IT ! An increase in the minimum wage to $10/hour is a given; and mandatory overtime pay for selected salaried workers probably has a legitimate shot at becoming law this year. We may actually be witnessing just the opening salvo in an extraordinary Government campaign to redistribute wealth in the United States. AND WALL STREET WON'T LIKE IT !!

The news from Ukraine/Crimea/Russia and the Euro-zone will get much, much worse before it gets better. While I don't think there will be a major financial collapse on the same scale of  Long Term Capital Management in 1998, the players are all the same (Russia, major hedge funds, corrupt politicians, incompetent central bankers, and related potential sanctions and subsequent probable defaults).

In the interest of full disclosure, I currently hold a large position in the Pro-Shares Ultra-Short S&P 500 ETF (symbol SDS) in one of my managed accounts. 

S&P 500 Monthly Bar Chart with Computer-generated Buy & Sell Signals

Russell 2000 Monthly Bar Chart with Computer-generated Buy & Sell Signals

 

U.S. Stock Market - UnPLUGged !

One of the hottest stocks in the history of the U.S. market crashed and burned today. Plug Power Inc. (symbol PLUG) opened this morning (Tuesday) at $11.50/share, up from a close of $10.31 on Monday. At today's opening there was no reason to think that PLUG wouldn't post another outrageous upside day, just like those that have regularly unfolded over the last three weeks. On February 20th, PLUG traded as low as $3.34/share, and in May 2013, this stock was just $0.12/share. Plug Power Inc operates in the Fuel Cells industry which is the single hottest sector this year; that is until today.

PLUG traded as high as $11.72/share immediately following today's opening and then collapsed. A negative research note by Andrew Left, an analyst with Citron Research, appeared to be the catalyst for today's dramatic decline. Most of the other stocks that operate in the Fuel Cells space also plunged (albeit after spectacular gains over the last several weeks). 

PLUG Hourly Bar Chart

So what? Why write a special stock market update on the collapse of a "penny" stock. Why is PLUG so important? 

To every trader of stocks, professional or amateur, the dream is always there to catch "the Big One". Just once, to own that "legitimate" company that advances from $1/share to $10/share; the "Holy Grail" of trading; the infamous "ten bagger". And some patient investors have actually achieved this amazing feat, usually accomplished over many years. PLUG was $0.47/share on November 7th, 2013. At today's intraday high, PLUG was up 2400% in just three short months. Wow! According to Mr. Left at Citron Research, PLUG earns no profits, has no unique technologies, and is currently the beneficiary of government subsidies within it's industry operating space (fuel cells). 

For any investor watching the fireworks in PLUG and other fuel cell related shares over the last few weeks, it was easy for them to rationalize holding their own stocks with the simple philosophy of "Why not my stock?". If PLUG can soar 2400% with its [outrageous] valuation metrics, my stocks must surely be worth more and could easily "catch fire" themselves! Makes perfect sense!

In my view, this is the philosophy that has contributed so greatly to the current record highs we are seeing almost daily in most major stock market indices, despite historic over-valuation in so many excellent time-tested metrics.

BUT NOW IT'S OVER! PLUG COLLAPSED 48% IN JUST A FEW SHORT HOURS TODAY AND INVESTORS ARE NOW THINKING "COULD MY STOCKS GO DOWN LIKE THAT?"

This conclusion may be a bit unorthodox and clearly "outside the box", but here are a few more thoughts that may be noteworthy and also have a basis in rigorous quantitative analysis.

Daily Chart sell signals were triggered within my computer-based trading program in the following major indices at today's New York close:

1. S&P 500 Index (see chart below)

2. Nasdaq Composite Index (see chart below)

3. Russell 2000 Stock Index

4. New York Composite Index

5. Dow Jones Industrial Average ETF (symbol DIA)

Sell signals were also triggered in the following sector indices: XOI, DVY, NDX, QQQ, OIH, OSX BKX, IWM, IWN, OEX, SPY, XBD, MSH, and SOX.

Bottom line: In many ways, it feels like March 2000 to me right now. Several excellent valuation parameters may have been slightly more stretched then as compared to now, but the price action looks very similar to me. And we all know what happened then. In the interest of full disclosure, I currently hold a large position in the Pro-Shares Ultra-Short S&P 500 ETF (symbol SDS) in one of my managed accounts.

S&P 500 Daily Bar Chart with Computer-generated Buy & Sell Signals

Nasdaq Composite Index with Computer-generated Buy & Sell Signals

 

U.S. Stock Market - Valuation, Sentiment, & Other Pricing Factors

The folks at Goldman Sachs (GS) produced some exceptional research this past week which probably should be incorporated in any decision to invest in the U.S. stock market now. Specifically, David Kostin and his team at GS produced the following noteworthy valuation chart which shows that for stocks in the S&P 500 Index the median Enterprise Value (EV) to Sales ratio is now at an all-time high.

And here is another example of the superlative research done regularly by veteran market watcher Ed Yardini (www.blog.yardeni.com), President and Chief Investment Stategist at Yardini Research, Inc.

Investor sentiment, which is normally considered a contrary indicator, should also be considered a worrisome variable. The following chart from Investors Intelligence clearly shows a dearth of bears.

China reported a trade deficit of $23 billion in February. I first saw this report late Friday afternoon, March 7th, but I can't be 100% sure this wasn't disseminated earlier in the day. My best appraisal here is that this information was NOT available during the NY trading day on Friday. Why is this important? According to Bloomberg News, the consensus projection from 45 economists was for a $14.5 billion SURPLUS!! Exports actually plunged 18.1% from the same month a year ago. The consensus estimate had called for an INCREASE of 7.5%.

When China sneezes does the rest of the world catch Pneumonia?

As reported several times in this column over the last few months, I have a proprietary computer screen that finds the most overvalued and the most undervalued stocks each week. The latest list of overvalued stocks has 119 names on it. Here are the first 25:

The average stock on this list trades at 167x Forward 12-month earnings estimates (F P/E), 12.19x Sales (P/S), and 15.15x Book Value (P/B). The average stock on this list has a current market capitalization of more than $13.0 billion, but produced negative earnings of $0.10 per share over the Trailing Twelve Months (EPS ttm). At one point in 2014, I believe that most of these stocks will be down as much as 50% or more. Biotech and drug-related companies have been purposely excluded from the above list given the need for special valuation metrics to analyze this particular sector. In the interest of full disclosure, I am NOT short any of the stocks on this list, but I do currently hold a large position in the Pro-Shares Ultra-Short S&P 500 ETF (symbol SDS) in one of my managed accounts.

U.S. Stock Market Leadership - The Day The Music Stopped

Friday, February 28th, will be remembered by many as "the day the music stopped".

The S&P 500 Index and the New York Composite Index posted all-time record highs on Friday, February 28th, but the Russell 2000 backed off its record high from the previous day. The Nasdaq Composite Index posted a 14-year high on Thursday last week, but it too fell back on Friday. Both the Dow Jones Industrial Average and the Dow Jones Transportation Average have not matched the S&P 500 Index and have yet to advance above their January 2014 record highs. However, this bearish technical "non-confirmation" is not the primary reason for this column today.

The focus of today's column is market leadership. Classic stock market tops are often characterized by parabolic "throw in the towel" panic buying in selected stocks that led the advance. Here are several high-profile companies where the feeding frenzy has been noteworthy and whose shares have posted outrageous returns in recent weeks:

 

The average gain from intra-day bottom to intra-day top in the above market leaders over the last three months was 65.43%. And the average loss in the same stocks from their intra-day highs last week to their closing prices on Friday, February 28th was -5.48%. The incredible fact here is that these 10 market leaders have already corrected 5.48% from their highs in a backdrop where the S&P 500 Index and the New York Composite Index were both advancing to all-time highs as posted on Friday, February 28th.

Bottom Line: The music has stopped; there are no more chairs; and February 28th will be remembered as "The Top" in one of the greatest bull markets in history. Potential "Black Swans" are everywhere; the U.S. Federal Reserve fails to see the early signs of a major liquidity crisis; and U.S. stock market investors will soon pay the price for over-weighting equities at stretched valuations in their investment portfolios.