SuttonWatch.Net: U.S. Stock Market

On Friday, April 4th, the closely watched S&P 500 Index was down 1.25% on the day. Given its spectacular advance over the last five years of approximately 185%, this single-day loss hardly seems significant; not even a hiccup; and dare we say less than a pimple on an elephant's ass.

So why do we care?

It is sometimes said that "Bull markets take the stairs, while bear markets take the elevators!"

It is my view that the great bull market in U.S. stocks over the last five years has ended, and that stock investors are now stuck in the elevators on the very top floor of the tallest building in the world, with nowhere to go but down! And the ride down won't be friendly!!

Burj Khalifa Tower in Dubai

On March 9th in this column, I published a list of the 25 most overvalued stocks. This list was generated by a relatively simple, but effective, stock screening algorithm. Biotech shares were purposely eliminated from this list given the need for special metrics in that particular sector.

Here is that same list, with all the same names updated through April 4th, 2014:

The average stock on this list is now down 18.11% from its closing price on Friday, March 7th through the close of trade on Friday, April 4th. While this is a significant correction, what's really amazing to me is that the S&P 500 Index AND the Dow Jones Industrial Index both posted ALL-TIME record intra-day highs on Friday, April 4th ! How is possible that the so-called best-of-the-best high-flyers lost 18.11% while the most popular broad market benchmark indexes (SPX & DJIA) advanced to new all-time highs? In the interest of full disclosure, I do not have a position in any of the above-listed names, but I do have a very large position in the Double-Short Proshares S&P 500 ETF (symbol SDS). For every 1% drop in the S&P 500 Index, the double-short SDS ETF is expected to rise by 2%. Of course, if the S&P 500 should advance by 1%, the double-short SDS ETF would then fall 2%. There is no such thing as a free lunch. Make no mistake, you have to be right to win here with these leveraged ETF's, but I like the odds (especially with VIX implied volatility still less than 14).

In my view, there is nowhere to hide now for stock investors!

Even though the high-flyers have now corrected 18% in the last month and are down 24% from there recent all-time highs, they STILL trade at more than 100x forward 12-month earnings forecasts, and they are still priced at more than 10x sales. As predicted several times in previous columns here this year so far, I strongly believe that the above list of 25 names will be down at least 50%, on average, at one point this year.

While the high-flyers were collapsing over the last month, stock investors have sought refuge in the so-called "safe" big-cap names of the S&P 500 Index. Unfortunately for many investors, this defensive rotation has run its course and a major correction in the big-cap benchmark indices is now underway.

Daily chart sell signals were triggered within my computer trading system in the following indices at Friday's close, April 4th: DJIA, SPX, SPY, OEX, Oil Services Index (OSX), Oil Services ETF (OIH), Semiconductors Holders ETF (SMH), Airline Index (XAL), Communications Index (XTC), and the New York Composite Index. To add insult to injury for the bulls, a daily chart buy signal was triggered in the VIX and also the double-short SDS ETF at Friday's close.

Here are my two most probable scenarios for the rest of this year:

1. The S&P 500 Index retraces 50% of its complete 5-year bull market advance from its low in March 2009 at 666.80 to its all-time record intra-day high yesterday at 1897.30. The translates into a 32% correction to the 1282.05 level.

2. The S&P 500 Index retraces 50% of its last major bullish leg from October 2011 at 1074.77 to yesterday's record intra-day high at 1897.30. This would translate into a 21% correction to the 1486.04 level.

Scenario #2 seems the most likely, of course, but I don't think you can rule out Scenario #1.

CASH IS KING ! NOWHERE ELSE TO HIDE !!