The S&P 500 is down a little more than 1% in the last two days despite largely positive economic data. As Cullen Roche so eloquently stated earlier this month:
But the market isn’t the economy. Main Street isn’t Wall Street. And the market is a heartless beast that desires one thing and one thing only- PROFITS!
What follows are the ten reasons (in no particular order) why I am cautious here, as I see the 1% dip over the last two days to be the beginning of a larger correction.
1. Another Earnings Season Sell-Off?
During some point in the past four earnings seasons the S&P 500 has sold off significantly. The trend has been to rally into earning, then to sell the news. Chart, via WSJ.
click to enlarge
2. Investor Sentiment
Both individual and professional sentiment remains high, as measured by AAII and NAAIM, respectively. Both readings are currently higher than one standard deviation above historical average bullish readings. Contrary indicator: historically returns are less favorable when sentiment readings are high.
3. Too Far Too Fast?
The current 22 month rally from the March 2009 lows has been 90.1% (click on chart to enlarge). The average 24 month rally to start bull markets is 56.1% with the next closest rally being 65.7% starting in October 1974. Have we come too far too fast? Chart and data via The Big Picture.
4. Low and Declining Put/Call Ratio
Since late 2003, when the 20 day rolling average put/call ratio has fallen below .55 (roughly 1 standard deviation from average) the average 30 day returns are -2.2% (-0.7% median) versus a series average of 0.2% (0.8% median). The current 20 day average put/call ratio is .52. The last time the ratio dropped below .55 (April ’10) the market sold-off roughly 14% over the next month-and-a-half. Chart here.
5. Equities Running Out of Breadth?
The ratio of the number of stocks gaining versus the number declining is struggling to regain 2010 levels. Data Diary suggests:
that the market has been gaining ground on the backs of fewer and fewer stocks. We could interpret this as more and more stocks are bumping up against valuation constraints – or put another way, valuation multiples can only move so far ahead of earnings growth.
6. Short Selling of Securities in the S&P 500 at 1 Year Low
Per Data Explorers. Potentially a contrary indicator – have the shorts thrown in the towel?
7. Tom DeMark Says U.S. Stocks Near Significant Decline.
Mr. DeMark, the creator of a set of Market-timing indicator, is calling for a decline of “at least 11%.” The last time his indicators gave a sell signal was mid-2007. Needless to say, the last quarter of '07 and '08 were not a good time to be in equities.
8. Consensus of 11 Strategists Surveyed by Bloomberg Says S&P 500 to Rise by 11% in 2011.
9. QE Ending in June, Maybe earlier?
There is some pressure, as the economy recovers, that QE is no longer needed. I would be surprised if QE2 ends in June, as scheduled, let alone early. But if it does, watch out.
10. Low Volume Rally
Volume has consistently trended down since the beginning of the March 2009 rally (click to enlarge).
Disclosure: I am long RWM.