Wednesday, April 24, 2013

Storm warning for the stock market

I see some red flags for the stock market. A couple of quantitative red flags are the Schiller PE10 (a ten-year rolling PE ratio), and the Value Line appreciation potential. Both indicate limited upside for the stock market. These two tend to be very slow moving and a bit early, but both have a good track record.

Another red flag was a bull on a pogo-stick on the cover of Barrons. Bulls on covers are a huge negative, and have marked more than a few market tops. There is also a bear on the cover, but the bear is confused and bewildered by the bull hopping over him.

I see these more as gale warning flags in the harbor. The storm is still out at sea, but it is on its way. However, like weather forecasts, the timing, the severity of the storm are difficult to pinpoint. 

One modest positive is the chatter amongst people I run into. At the investors meetup it was mostly a serious crowd, almost all market veterans. I got that feeling by the kind of questions asked and the stocks mentioned. At market tops, a lot of novices are wanting in. The meetup is advertised on the Internet, so a lot of people see it. Other folks still say crap like it is all a Fed induced stock bubble, or the stock market is fixed, and a person would be crazy to want to play the market. These tend not be things know-nothings say at market tops. At market tops, people want tips, they want to invest their tax refund or some other tiny amount, and may want me to help them get started.

Still, I am putting up some gale warning up. It doesn't mean it is time to duck and cover, but some caution, some storm preparation is a good thing. To use the boating analogy, it is not the time to be planning a deep sea fishing expedition. And as I always say, no indicator is 100%. 

Some like to wait for technical confirmation, for the market to actually turn down before acting. One popular indicator is the 200 day moving average. Another is looking for three consecutive down months of 2% or more. Sharp corrections are more indicative of a bull market, while a slow rolling over, often means the longer term trend has change. While I have not back tested for precious metals, the 2% up (or down) for three consecutive months might be useful for those markets as well to signal a change in the intermediate trend.

As an aside, old timers may remember the pre-Internet days, when the Value Line binder in the library was like a wizards tome. Only a few seemed to know about it, and how to read it and use it. Another book of spells, so to speak, was the small S&P paper stock guide that had one line of info for many of the stocks that Value Line did not cover (1700). I sound old, don't I. Now anybody can get much more up to date information on any of the many websites, often for free.

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