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Is This The Top? Or Is That The Top?

|Includes:Kimberly-Clark Corporation (KMB), TGT, WMT, XOM

There are many discussions underway, on Seeking Alpha and elsewhere, about a market correction being possible or probable.

From my standpoint on July 7, I am motivated to keep my eyes and ears sharp, but haven't had a moment of complete clarity yet.

There certainly seems to be an increasing difficulty in finding undervalued stocks, especially in the arena I like - big companies that pay dividends.

We constantly hear from some quarters about the "always about to start" bull market in gold signaling an economic disaster somewhere, not to mention those folks that always are crying that there is an immediate crisis in Fed-caused inflation. Calamity of biblical proportions is just a moment away according to some pundits.

A simple minded fellow barely knows what to do.

The undeniable bull seems inexhaustible at the moment, yet we all know things can't go on this way forever. Can they?

The problem can be seen in the following chart. (Thank you, bigcharts.com www.bigcharts.com)

DOW 30 Long Term Chart

There are so many things to note. But I will leave the Stochastic and MacD for another time.

Let's look at the trend lines, the most simple technical analysis tool of all.

These chosen "trend" lines I've drawn in the above chart, comprise a widening formation. This is often considered a sign of weakness, as the energy is dissipated, and is the opposite of a pennant, where the lines converge and energy builds. Look at the previous declines ('03, '09) which were corrections of about 45% and 55% respectively. One could ponder the question of whether the next correction could be 65%.

Negative issues that support a bear point of view include the obvious cyclical pattern, the fear in some quarters that we are on the cusp of another recession, and that the market has become an overheated, retail frenzy, as well as other indications. (Interesting SA Article: seekingalpha.com/article/2255693-correct...)

Let's be contrary.

There is another point of view, a bullish one, that I think has at least three interesting elements.

First, the third time an event takes place on a chart, sometimes the price action goes the opposite of what might be expected. I've been stung by this before.

In today's case consider that prices could break out to the upside, and the overhead trendline becomes support. Amid this price action, sentiment is very on-guard against a correction. Consider the active discussions where fear of correction dominates.

Note the following data as of June 30, 2014, from Market Vane, via Barron's.

Market Vane as of July 7th, 2014
  Bullish Consensus Last week 66% Two Weeks Ago 64% Three Weeks Ago
64%
Source: Market Vane, P.O. Box 90490,
Pasadena, CA 91109 (626) 395-7436.
Click to enlarge

Hardly commensurate with the scale of the current bull run. This strong an up move could well see much higher consensus numbers, in my opinion.

I'd interpret the modest Consensus as an indication that the market has the ability to rise further, but not a guarantee that it will.

Second, most corporate earnings seem good. Not perfect, but a lot more good than bad. Yes, the market is in its upper ranges of PE, and lower ranges of dividend percentages for many companies, and yet, there is hardly a down day. To me, this does not appear to have the qualities of a top. Maybe a top before a correction, but certainly not a blow off top.

Third, there is the Fed. The July 4th New York Times said, of the Fed's Janet Yellin, "She believes that it would most likely be a bad idea to raise interest rates to fight financial excesses."

So get ready to see excesses!

There is a good argument that Fed intervention is the huge driver of this market. I think it is almost indispurable.

Supporting the idea that we are not in a crazy, blow the top off, bull market yet, is the PE situation.

Yes, some PEs are high, but they aren't crazy high or even at the top the historical range for the company.

Peek at a few five year numbers.

Exxon (NYSE:XOM) current PE, 13.95, Historic high, 17.9. Historic low, 8.5.

Kimberely Clark (NYSE:KMB) current PE, 20. Historic high 23, minimum 12.8.

Walmart (NYSE:WMT) is slightly richer at a PE of 15.8 vs a maximum high PE of 18.6.

WMT's rival Target (NYSE:TGT) shows a PE of 20.07 and a peak PE of 20.92.

(Source: Yahoo)

Conclusion? Price and PEs are working their way to higher and riskier places, but they are not yet ready be called froth.

Allow me the liberty of suggesting one possible path for prices.

Instead of an immediate large correction, which would be very healthy for the market, I think, we may see one small pause, followed by dramatically higher prices.

(Contra indicator: My having expressed a cautiously bullishsentiment can be taken as an indicator that we are moments awayfrom an epic crash.)

My precedent for suggesting the blow-off type price action is the price action we see in precious metals markets, which seem to follow this pattern from time to time.

Could we be headed for a true blow off top?

A blow off top involves increasingly steeper chart patterns. We can see this phenomenon from time to time in the price action of gold and silver.

The following weekly SLV chart begins in '06 and shows the price action top that silver experienced.Silver as represented by SLV.

The SLV top that was reached in '11 was preceded by a steep, buying panic-like, ascent. Note the period where prices rocketed from 20 to 30, and then rested. That seems to me to be the most like our present time in the Dow. (Please don't take this comment as a forecast or prediction.) Silver then ran from about 26 to 47. A rather dramatic increase in value.

Then we had the correction. Do you remember the euphoria near that top? The long, grinding SLV bear market continues through today.

Charts are neither hocus pocus, nor foolproof indicators of the markets, but they are undeniable visual records of past price action, and the price action is the record of investor opinion about a security at any one point in time. In this case, it is a record of undue enthusiasm.

Where do we go from here?

Of course, no one knows. People who profess to know with certainty puzzle me. I think there is uncharted territory ahead, largely due to the Fed, and that the intervention will make any collapse, if and when it comes, worse rather then better. How far down the road can they "Kick the Can?"

The Fed problem, however, does sound a little like the "this time it is different" argument, wherein neophytes to markets think history will not repeat itself. Certainly many indicators favor the probability of a correction. So if we accept that there will be a correction eventually, the question is, when? In six days? Six months? Six years?

Our job meanwhile, is to try and guess the future and measure our own steel by how much craziness we can stand.

In a moving elevator surroundings seem normal. To those outside the elevator the speed of ascent can cause alarm.

My old friend Gene Morgan, of Charting the Markets, once said, "You never know how high, 'high' is, and you never know how low 'low' is."

In support of that, I make no claim to knowing where the market will go next, and simply want to expand the debate.

As an amateur investor I try to invest so as to weather the storms and benefit from the sunny days. Watching the price patterns from the past helps me plan for the unpredictable future.

I hope you'll add a little chart reading to your fundamental analysis, and perhaps this little commentary will serve as food for thought.

As a departing thought, I remain very concerned that the unrelenting bull market, taken as a whole looks like an unreasonable advance, because it has had precious few resting periods. I am constantly seeking ways to be defensive in the face of this market, and I do think that any investor in the stock market must evaluate for themselves how much higher this market can go before a correction, either modest and healthy or big and bad, takes place.

The unprecedented nature of today's stock market warrants careful thinking.

Disclosure: The author is long WMT, KMB, TGT, SO, T. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This commentary is simply meant to be a starting place for readers to assess where they feel that market is headed. My personal fear is that there will be a significant correction and bear market sooner rather than later. However, I thought a contrary view might spark an interesting debate. I am long about 40 dividend paying large caps. Due to the unique nature of the overall market at this time my positions may be liquidated on short notice.

Stocks: KMB, TGT, WMT, XOM