Stocks Are Overvalued and Overbought

In today's report we will discuss the labor market, Bernanke's comments, bad loans rising, and how the S&P 500 is now overbought.

The Labor Department Reported Sobering Unemployment Data

The US economy lost 3.4 million jobs in the first half of 2009, more than the 3.1 million lost in all of 2008.

This puts President Obama well behind the eight-ball when it comes to his pledge to create or save four million jobs.

Year over year unemployment is higher in all fifty states, and in June jobless rates rose in 38 states, and six states have record-high modern day unemployment rates, led by Michigan’s 15% unemployment.

Meanwhile, 15 states have reached the 10% unemployment rate threshold.

Bernanke’s Semiannual Testimony Mixed with Reality and Unrealistic Expectations

Fed Chief Ben Bernanke actually made some cautionary comments about the US economy in testimony on Wednesday.

Gentle Ben indicated that with unemployment stubbornly high, and consumers tightening purse strings, a return to healthy economic growth remains distant for the US economy.

Bernanke still expects the economy to recover, but slowly as consumers and homeowners face high debt loads, with wealth greatly reduced by both lower equity prices and home values.

I think expecting any growth at all is overly optimistic, as most of the data points we have seen for June versus May shows the green shoots turning into tumbling tumble weeds.

Bad Loans Continue to Be a Growing Problem for the US Economy

Foreclosures are on the rise, and president Obama’s "Making Housing Affordable" is not working.

Losses on credit card debt could reach $100 billion in 2009. C&D loans have caused 57 banks to fail year to date.

Home equity loans will be failing particularly on loans were the primary mortgage is serviced by a different bank. Commercial real estate loans are seeing their highest default rates since 1982.

Intertwining all of these growing bad loans is the more than $200 trillion in notional amount of derivative contracts, which include structures still to be explained.

Main Street USA is hurting as shovel ready projects do not get funded. Instead money received by most states is merely being used to plug local budget and deficit shortfalls.

The S&P 500 Has Become Overbought on Its Daily Chart

The S&P 500 set a new high for the move at 959.83 on Wednesday testing this week’s resistance at 957.9. Since calling for a 40% to 50% rally off the March 6^th low of 666.92, the rally has decelerated.

I projected May 8^th to be the high following the bank stress tests, which has been the peak for community and regional banks. Since than the S&P has risen only 3% from 930.17 on May 8 to 959.83 yesterday.

The S&P 500 is now overbought and trading between my annual pivot at 910.8, and my annual resistance at 967.1. Last year the S&P 500 peaked on August 11^th as the earnings season winded down.

We show eight of eleven sectors overvalued, which is not the environment for bulls to survival.

Have a great day.

Disclosure: No positons

Comments

[I need more cowbell]

Yeah, yeah, yeah, tell all that to Goldman's JP Morgans computers. They dictate the market every day on low volume.
Now where is Beek's with that crop report?

2009 Jul 23 10:11 AM

[Tincho Sibileau]

We are reading everywhere how overbought the market is, including the CDX IG12 at 124/125bps, for instance.

Overbought with respect to which level? Investors in the developed world, the world that leaves us no time to think, are so used to inductive reasoning (en.wikipedia.org/wiki/... and www.uncg.edu/phi/phi11... ) that they are quick to make all kinds of statistical inferences referring to past events.

How dare they?

When was the last time we had a balance sheet crisis with central banking coordination, a trillion plus in monetary expansion, emerging markets with trade surpluses, a credit derivatives market and a superpower issuing debt on a weekly basis the size of an average country’s GDP? When?

Anyway, it’s of great comfort to know that we (still) have futures and derivatives markets to hedge the mistakes of all those experiments in statistical inference.

2009 Jul 23 10:27 AM

[Mad Hedge Fund Trader]

No. Doubt. Let me tell you that I, and the rest of the hedge fund industry, are highly suspicious of the global stock market rally that has ensued over the past week. Companies lowered earnings expectations so far they were easy to beat, and could be achieved by laying off a few more workers. The question this raises is how the economy moves forward with skyrocketing unemployment. Now that we have double topped in the S&P 500 at 956, even the bulls are saying we only have another 4% to go. This on a day when we are all wondering if commercial real estate loans will be the stick that breaks the back of the banking industry. Mike Mayo, a banking analyst with Clayon Securities, says that the industry may have to write off a quarter of its $7 trillion loan book over the next three years, levels greater than seen during the Great Depression. While banks are making a lot of money trading, they are losing it even faster in loan losses. It’s like trying to fill a barrel with water that has been perforated with a shotgun blast. If you are playing from the long side here, keep one foot in the exit, and a finger right on your mouse.

2009 Jul 23 10:28 AM

[Larry House]

I agree with you, but that doesn't mean stocks aren't going higher.

2009 Jul 23 10:29 AM

[basehitz]

The bulls have the tape and the microphone. Every report is spun by the corrupt financial media and WS frat house. An upside breakout is in the making.

In 1999 when valuations were a farse, did any of the above care? No, not until it ended in tears. I expect that again because we have grossly mismanaged our finances and papering over mistakes doesn't fix anything.

But I'm not short. . . yet.

2009 Jul 23 10:42 AM

[The Geoffster]

I get all that. Should I cover?

2009 Jul 23 10:44 AM

[WhoisJohnGalt]

Larry's right. To make money in this market requires one to invest on perception rather than reality. The question is then how long? Be sure to protect yourself from huge downside risk via puts because when the correction happens, the sober crash will come swifter than this past week's rally.

2009 Jul 23 10:46 AM

[Tincho Sibileau]

Guys, guys, hold on there...Since when are valuations attached to fundamentals? The Fed is spitting liquidity by the billions on a weekly basis.

Let me see...when the markets crashed, all of you would have laughed if anyone would have said something like: "Don't panic, don't sell, fundamentals are good!" Right? And now, a trillion plus of freshly printed liquidity later, you expect people not to buy because fundamentals are bad?

Have you ever seen inflation with full employment? No! Precisely, inflation lives together with unemployment!

2009 Jul 23 10:49 AM

[ken3602]

and the market keeps going up... I am personally fine with that since my long positions doing well with that, but it seems the time to seriouly build protection / hedging positions.

2009 Jul 23 10:55 AM

[RiskReturnOptimizer]

Normalized US Equity by value of US Dollar and you will get your answer to sustainability of current rally.

To keep things simple, use SPY * UUP as the "dollar adjusted value of US market." A US investor whose dollar priced SPY increases by 1% while UUP decreases by 1% in not gaining purchasing power vs. rest of the world.

2009 Jul 23 11:32 AM

[AndrewBaker]

I agree wholeheartedly ... but the market keeps going up, and I'm a wounded bear because of it. I'm conserving my fuel right now to get back when, eventually, the reversal comes. It may be a while in coming, judging by what's going on and much of it due to market manipulation by soundbite, but when it does, what a fall!

2009 Jul 23 11:44 AM

[cameroni]

With so many getting prepared for the worst and backstopping against potential losses etc you might well imagine that a sudden sell-off led by the big boys would result in a sharp and precipitous market decline as too many sell trades are triggered automatically. I would not rule out a September crash.

2009 Jul 23 11:57 AM

[Dave Wrixon]

The whole ethos is built on the impossible to fail scenario.

It is now assumed that, however, incompetent or corrupt the American regime is, things can only get better. Debt is now regarded as imperative if you are to have any financial credibility, and apparently the more the better.

2009 Jul 23 12:43 PM

[TurtleTrader72]

Stock may be overvalued and overbought, but the problem is that they can remain that way for along time. We have seen this happen time and time again, so sticking to a thought that does not comply with the market can cost you alot of money. Regardless, I do agree with the author..

2009 Jul 23 01:59 PM

[Susan Weerts]

Stocks are definitely overvalued and overbought in the short term. If a lot of people expected a V-shape recovery (which I doubt), some, a.k.a, the buy and hold, might argue that it might not be the case in the long run.

Many cited tiday's housing resale number as one of indicators of economics recovery. Did anyone know whether this number is season-adjusted? The housing market trends up in March and peaks in June and July, as many people try to move before the new school year. If the number just compared to previous months, it really didn't tell much.

2009 Jul 23 03:44 PM

[jstratt]

I value Suttmeier's views! It is hard not to question the rapid runup in stocks over the past 10 days.

On the other hand the drop off in business seems to be leveling off. The S&P 500 closed at about 63% of its highs. One reason I offer a point of caution is that I remember the last big downturn 30 years ago. As in this downturn people get conditioned to looking down and only bad news even gets considered.

The earnings this quarter are better than expected and suggest to me that the rest of the year will compare well. The productivity improvements will allow profits to rise from increased activity. As an example Auto demand has been building for 2 years. Cars wear out and the extreme bearishness can easily turn to extreme buying.

By the time more people begin to believe that things can go up we will probably get some regional banks or commercial real estate type issues to drive stocks back down. However we appear to have bottomed.

2009 Jul 23 05:00 PM

[Tomcat101]

So much for your 967 resistance level....

2009 Jul 23 05:13 PM

[Mad Hedge Fund Trader]

Another day closer to the peak. There is no doubt that the next trade from here in stocks is a sell. Buying NASDAQ on a 12th consecutive up day, the S&P 500 on the back of a 110 point move, and the Dow on top of a 1,000 point pop is not what great fortunes are made of. After stopping out of my own shorts in the 880’s, I have been holding back, holding back, holding back. See my warning not to sell too soon at www.madhedgefundtrader.... I have never been one to fight the tape. The only trader who is always right is Mr. Market. The earnings to support a full fledged bull market are not just there. Deleveraging worlds don’t support expanding earnings multiples. It all works for me because the more it goes up now, the bigger the fall later. Even the raging bulls are warning about a “W” shaped recession and another market dive in 2010. How finely do you want to trade this thing? It’s clear the big core shorts at the major hedge funds haven’t budged, and that most of the recent low volume action has come from day traders, momentum players and CTA’s. All we need now is for mom and pop to come in and ring the bell at the top. Is 2009 going to be replay of 2008? Is a “Sell in May and go Away” at www.madhedgefundtrader... to be followed by another October crash? If your friends’ long positions make money from here, just revel in their good fortune, and let them pick up the dinner check.

2009 Jul 23 06:40 PM

[cameroni]

I think you have a good point Susan. Seasonality is one of the most important considerations right now as we assess the sustainability of the real estate market. Looking overseas we can already get a taste of what is to come as European countries are already experiencing sharp declines in rental prices and increased vacancy rates. The problem of course is the same there as it is here. Overbuilding and overpriced homes.

I monitor employment rates. That is the key in my opinion to understanding economic strength and how robust a recovery we may have. At the moment those rates tell me beyond a shadow of a doubt that the economy will contract in almost every sector for the foreseeable future.

Sustained, growing and continuing high levels of unemployment will deprive us of a rebound in residential prices and no recovery is imminent. High levels of unemployment will further weigh on consumption and suppress the driving force behind not just US GDP but global economic activity.

Furthermore, reductions in real wages and salaries, reduced working hours and persistent structural employment issues will hamper Government virtually all growth predictions.

I do not put any stock in the rosy predictions from the Gov't, Fed, or IMF. Those messages are designed to instill confidence in a public familiar with institutional good-will messages. But only a foolish investor will believe that poppycock.

Virtually every indicator is still in decline and the picture will only worsen as fall approaches and investment begins to drop off for the winter season. We only have Christmas and 3rd quarter earnings to look forward too.

With the very high level of domestic savings now (and much reduced spending) we can assume Christmas will be a bust. This will be the season to start shorting commercial real estate too as the new message and reality starts to sink in and more malls go bust.

We should brace ourselves now for a few very high profile retail bankruptcies and some dizzying losses on the commercial property side. These have long been predicted but that day will soon be at hand and I foresee a major reckoning of accounts before January 2010 is over.

Only a major release of stimulus can reverse the carnage but of course we all know already that stimulus will simply release a whole different nasty damage as serious inflation kicks in. We will not get out of this dilemma unscathed in any case.

If the employment picture does not improve we are headed for hell in a hand-basket. So take cover while there is still time and use your own head when listening to the rosy picture painted by the powers that be.........


On Jul 23 03:44 PM Susan Weerts wrote:

> Stocks are definitely overvalued and overbought in the short term.
> If a lot of people expected a V-shape recovery (which I doubt), some,
> a.k.a, the buy and hold, might argue that it might not be the case
> in the long run.
>
> Many cited tiday's housing resale number as one of indicators of
> economics recovery. Did anyone know whether this number is season-adjusted?
> The housing market trends up in March and peaks in June and July,
> as many people try to move before the new school year. If the number
> just compared to previous months, it really didn't tell much.

2009 Jul 23 10:32 PM

[Susan Weerts]

Thanks for your reply. Seasonality is one of key factors in many economics indictors. The light trading volumes in summertime tend to make the stock market subject to manipulation.

Many economists/commentators labeled unemployment rates as a lagging indicator. I incline to think that it might not be the case in this recession. One of major reasons for this recession is rapidly falling consumption. The higher unemployment rate will further reduce the future consumption. Hence, I view unemployment rates this time as a possible cause of this recession, instead of a reactionary factor of previous recessions. Unless the job market gets stable, I have hard time to see any meaning recovery.

On Jul 23 10:32 PM cameroni wrote:

> I think you have a good point Susan. Seasonality is one of the most
> important considerations right now as we assess the sustainability
> of the real estate market. Looking overseas we can already get a
> taste of what is to come as European countries are already experiencing
> sharp declines in rental prices and increased vacancy rates. The
> problem of course is the same there as it is here. Overbuilding and
> overpriced homes.
>
> I monitor employment rates. That is the key in my opinion to understanding
> economic strength and how robust a recovery we may have. At the moment
> those rates tell me beyond a shadow of a doubt that the economy will
> contract in almost every sector for the foreseeable future.
>
> Sustained, growing and continuing high levels of unemployment will
> deprive us of a rebound in residential prices and no recovery is
> imminent. High levels of unemployment will further weigh on consumption
> and suppress the driving force behind not just US GDP but global
> economic activity.
>
> Furthermore, reductions in real wages and salaries, reduced working
> hours and persistent structural employment issues will hamper Government
> virtually all growth predictions.
>
> I do not put any stock in the rosy predictions from the Gov't, Fed,
> or IMF. Those messages are designed to instill confidence in a public
> familiar with institutional good-will messages. But only a foolish
> investor will believe that poppycock.
>
> Virtually every indicator is still in decline and the picture will
> only worsen as fall approaches and investment begins to drop off
> for the winter season. We only have Christmas and 3rd quarter earnings
> to look forward too.
>
> With the very high level of domestic savings now (and much reduced
> spending) we can assume Christmas will be a bust. This will be the
> season to start shorting commercial real estate too as the new message
> and reality starts to sink in and more malls go bust.
>
> We should brace ourselves now for a few very high profile retail
> bankruptcies and some dizzying losses on the commercial property
> side. These have long been predicted but that day will soon be at
> hand and I foresee a major reckoning of accounts before January 2010
> is over.
>
> Only a major release of stimulus can reverse the carnage but of course
> we all know already that stimulus will simply release a whole different
> nasty damage as serious inflation kicks in. We will not get out of
> this dilemma unscathed in any case.
>
> If the employment picture does not improve we are headed for hell
> in a hand-basket. So take cover while there is still time and use
> your own head when listening to the rosy picture painted by the powers
> that be.........

2009 Jul 23 11:27 PM