U.S. Stock Market - A Bridge Too Far

Any discussion of the greatest stock market analysts of all time must include the name Laszlo Birinyi. Very few can claim to match his incredible track record of prescient forecasts, and fewer still have his extraordinary ability to view the "forest through the trees" to capitalize on exceptional long term trends. Last week, Mr. Birinyi raised his upside target for the S&P 500 (yet again) from 1,970 to 2,100. This new target is expected to be reached within the next six months and corresponds to the largest spread between the S&P 500 and its 200-day moving average since 2010.  

While every great analyst has his or her own "secret" indicators, and Mr. Birinyi may very well have found the "keys to the kingdom", it looks to me like the primary reason for raising his target is the fact that we're in a bull market and the bullish case must be given the benefit of the doubt. According to Mr. Birinyi in a note to his clients, investors should acknowledge that this is not an ordinary, average, typical or normal bull market and thus many approaches and metrics are not useful or applicable. And most interesting to me is the fact that Mr. Birinyi acknowledges that according to some tried and true valuation measures, like the Shiller CAPE ratio, the current U.S. stock market may very well be as overvalued now as it was at the major tops in 1929, 2000, and 2007.

The fact that Mr. Birinyi has a hot hand right now can't be disputed. He's nailed this 5-year bull market like almost no one on the Street. But I think this latest upside revision to his forecast is a "bridge too far". I have attached two charts for your review:

1. The New York Composite Index Daily Chart against the spread between its daily closing price minus its 200-Day Moving Average. It may be noteworthy that when this spread gets to 800, the rally is stock prices stalls or even corrects. While all the corrections have been relatively shallow so far, they have been significant and worthy of attention.

2. The Dow Jones Utility Average Weekly Chart - A weekly chart sell signal was triggered last week by my computer trading system in this key market barometer. Despite the well publicized $200 million personal bet by PIMCO's Bill Gross that U.S. interest rates will stay low or move lower, my research suggests otherwise. Longer-term T-Bond prices look heavy to me, and with the Fed clearly in "tapering" mode, my view is that a meaningful intermediate term top in long term bond prices is now in place in this market.

The title of this column refers to the disastrous Operation Market Garden in World War II where the Allies attempted to break through German lines at Arnhem across the river Rhine in the occupied Netherlands in September 1944. A Bridge Too Far is the title of the non-fiction book by Cornelius Ryan published in 1974 which tells the story of Operation Market Garden. The title of this book comes from a comment made by British Lt. Gen. Frederick Browning, deputy commander of the First Allied Airborne Army, who told Field Marshal Bernard Montgomery before the operation, "I think we may be going a bridge too far."

NY Composite Index Weekly Chart with Spread Between 200-day MA & Actual Closing Price

Dow Jones Utility Average Weekly Chart with Computer-generated Buy & Sell Signals