Some market pundits see the conditions developing for a crash in equities as there appears to be an over-exuberance in chasing stocks up.

In 1987 stocks ran up for about 10 months before experiencing a monumental collapse of over 23% in a single day on October 19, 1987.

In the chart below, the price action in 1987 has been overlaid with this year’s movement. Stocks in 1987 actually started the year out much stronger than this year where they were up over 20% into late March. The market then consolidated from April through the middle of June 1987.

This year’s advance has been much steadier and is about even in percentage terms versus 1987 at this point in time.

As always, it’s difficult to draw a conclusion as to what comes next. In the near future I’ll go back and compare the two time periods from where the main advance began into the blow-off top (middle of November 2013 and January 1987).

Comparing the case for a positive market with the trial in “My Cousin Vinny” where the evidence was so overwhelming the judge proclaimed, “case dismissed,” Tepper made the case for a continued stock market rally.

“The economy is getting better, autos are better, housing is better, they can’t find enough people to work in housing is the only thing holding it back right now…Australia just eased, the ECB just eased, Korea just eased, Japan is in massive easing mode, and these United States of America we are just amazed at the way these numbers work as we go out further,” Tepper gushed.

Tepper proceeded to discuss the tapering moves by the Fed. Tepper said the numbers are truly amazing. “The Fed is going to purchase $85 billion of treasuries and mortgages a month,” Tepper said and added, “If you look at the numbers over the next six months because of tax increases, because of budget cuts, because of growth in the economy, and also because of Fannie Mae and Freddie Mac paying back money to the government, the deficit over the next six months is shrinking massively.”

The deficit will be well under $100 billion, probably closer to $85 billion over the next six months, and with the Fed buying $500 billion, you have $400 billion that has to be made up, Tepper stated. That $400 billion is being taken out of the market, the bond market, and is now in everyone’s hands, according to Tepper. That money either has to go in the economy, it has to make the short and long ends of the curve trade better, or it has to make stocks trade higher, Tepper added.

Tepper said if we don’t taper back we’ll get into “this hyper drive market.” “These numbers are so tremendous you have the market in sort of a hyper mode potentially,” Tepper explained.

Tepper said, “I don’t know where the money goes, and you know who else doesn’t know where the money goes…the Federal Reserve of the United States of America.”

The interview continued with Tepper further discussing why the Fed needs to taper for a smooth market move, why if there is not a true taper the market will end up like the last half of 1999, the state of the equity risk premium, what future moves could come from the ECB, why all stock markets are the place to be, and why he and Dan Loeb are particularly bullish on Japan.

Back in January, Tepper said the U. S. was on the verge of an “explosion of greatness [link].”

“Japan has started a big battle and it’s resonating around the world,” he added. Japan’s policy is so aggressive that it’s sucking the world down with it, he stated.

Rickards quipped that he might not live long enough to see a rate increase from the Fed which is trying to prop up real estate and stock prices and create a wealth effect and improve confidence.

Rickards stated the Fed is trying to inflate asset prices without creating bubble. How do they do that? Rickards said the answer is that every now and then they need to let a little air out of the bubble. But Rickards added that the Fed is no where near reducing purchases of bonds and raising rates, so it will be years at the earliest.

Rickards believes stocks will go up through the rest of this year but warned you’re riding a wave and “when bubbles pop they pop very quickly.” But this bubble could go on a year or even longer, he added.

Lo brought up the fact that the Chinese market has not followed suit with the rest of the world and asked Rickards if they would catch up to the others. Rickards said he thought China had a lot of problems and they “were in a different place.”

Rickards went on to explain why China needs to let their currency rise and their economy is going to slow significantly [see video below].

Back in November 2011, Rickards said the best case for the U. S. was a lost decade, but the worst case was much worse [link].

Excerpt:

My solution: I am buying smaller stocks where I am not competing for information against massive hedge funds and mutual funds that do everything they can to cheat the system (insider trading, manipulative trading, high frequency trading, special access to secondaries, etc).

I also invest in long-term demographic trends that I believe in. These companies will do well regardless of the overall stock market. It’s why microcaps always outperform large caps in the long run.

Source: Seeking Alpha

Barron’s columnist Kopin Tan writes about “Searching for Signs of a Market Top.”

Excerpt:

Barron’s semiannual Big Money poll recently showed 74% of professionals who identified as bullish or very bullish, the most in the poll’s two-decade history.

Source: Barron’s

Darcy Keith of Canada’s The Globe and Mail interviews Marc Faber. Excerpt:

“In the 40 years I’ve been working as an economist and investor, I have never seen such a disconnect between the asset market and the economic reality … Asset markets are in the sky and the economy of the ordinary people is in the dumps, where their real incomes adjusted for inflation are going down and asset markets are going up.

“Something will break very bad.”

Source: The Globe and Mail

Kevin Simms and Joseph G. Paul at AllianceBernstein, see opportunities for investors in global deep-value situations, which have suffered through a five year relative slump.

Excerpt:

As a result of all of these trends, the opportunity in deep value stocks has become very compelling. We measure this by looking at spreads between the most attractive quintile of global equities based on price/book valuations and the most expensive stocks have widened. Even after the equity market rally of recent months, these spreads are wider than almost any time in the last 50 years, except for during the technology bubble. Typically, when this ratio has narrowed and the line has declined, the cheapest stocks have outperformed strongly.

Source: AllianceBernstein Blog

CNNMoney columnist Shawn Tully writes equities are actually pricey, just when the “experts” are claiming they’re cheap.

Excerpt:

Today, the price-to-earnings multiple on the S&P 500 (SPX) is 18.6 (its current price of 1620 divided by trailing, 12-month earnings-per-share of around $87 a share). That’s well above average of roughly 16 over the past century, but in line with the ratio in the last two decades.

That seemingly middling number is highly misleading. Masking the lofty valuations is a virtual bubble in corporate earnings. Since the fourth quarter of 2009, S&P 500 profits have jumped 71%. Earnings as a portion of the overall economy stand at 11%, vs. a long-term norm of 7%. In the Fortune 500 list released on May 6th, profits as a share of revenues were 6.8%, compared with an average since the mid-1950s of 5.2%.

Source: CNNMoney

Several notes from the interview include:

Grantham commented on the commodity inflation from 2002-2008 where the price of commodities rose faster than in World War II and erased 100 years of general decline in prices.

Grantham mentioned China’s insatiable demand for commodities: the Chinese consume 53% of all the cement used on the planet, along with 47% of all the coal, 46% of all of the iron ore; unimaginable numbers by Grantham’s estimation.

Grantham rode his hobby horse of the dangers posed by global warming stating there was more than enough carbon based fuel (5 times to be exact) to “cook our goose.”

Grantham’s penchant for analyzing investment bubbles revealed one which has defied the law of bursting; oil. An interesting tidbit for the prospective investor in fossil fuel producers.

Grantham commented on phosphorus where the supply is finite (about a 50 year supply left) and which is required by all life to grow.

Regarding the tendency for empires to collapse, Grantham believes people’s sense of chutzpah and arrogance, or a belief that humans can accomplish anything they put their mind to, leads to overreach, and constitutes a primary factor in the eventual fall.

There is hope in Grantham’s mind and it has to do with the declining fertility rate. In the past when families were wealthy they would have numerous offspring, but that tendency has completely reversed. Grantham also sees hope in the development of cheaper renewable energy sources.

The pricing out of poorer populations by the wealthier nation’s demands on resources, resulting in some cases, their starvation according to Grantham, was a sobering reminder of the unfairness dealt a subsection of humanity in today’s age.

Grantham proceeded to discuss his analysis of bubbles beginning with the tech bubble where he said stocks were as overpriced in 1997 as they were in 1929, prior to the insane run-up into the year 2000.

Grantham discussed the Japanese bubble, the biggest in history by his estimation, where investors were paying $65 for each $1 of earnings compared to the U. S. tech bubble where $35 was paid for each dollar of earnings at its peak.

Grantham touched on the banking crisis in 2008 and said he would have let more financial institutions fail than the government did at the time. In fact, he wouldn’t have come to Citigroup’s rescue.

As far as investment values are concerned, Grantham said the large franchise companies in the U. S. such as Coca Cola (KO) were not too overpriced, although the rest of the U. S. market is priced to deliver zero returns for the foreseeable future. Grantham said investors would do well in emerging markets equities.

Regarding the Federal Reserve Grantham stated, “Bernanke is whipping this donkey that can only grow at one percent because he thinks it’s a racehorse that should be growing at three, so he’s going to keep on whipping it until the donkey drops dead or turns into a racehorse.” Grantham is betting on dead. He added the Fed doesn’t have the tools to generate employment and it shouldn’t be in their mandate.

Grantham discussed debt, which he doesn’t believe has any effect on GDP, and the subsidization of debt by Bernanke which is takes money from retirees and other savers and indirectly transfers it to hedge fund managers, bankers and speculators.

The interview can be accessed in its entirety at the link below:

http://www.charlierose.com/view/content/12812

In the video below Harrington Capital Management founder Kyle Harrington and American Wealth Management President Laif Meidell look at the merits of Goodyear Tire (GT), Edwards Lifesciences (EW), Ford Motor (F), and Qualcomm (QCOM) which Goldman sees having 30% upside.

A couple of stocks from Goldman’s list the guests didn’t like included Prudential Financial (PRU) and Joy Global (JOY).

Business Insider has all of Goldman’s 40 most undervalued stocks here –> [link].

Acampora stated that the U. S. is on the threshold of becoming energy independent. “Stop for a second and think about what that means…that means the money we save on importing oil and the revenues we’re going to make on exporting energy is going to be magnanimous…and if that happens, and I know it will happen, all the concerns about budget deficits and things like that may get muted, and in a big way, and the market looks ahead and it looks at that above and beyond all the rhetoric we hear about the current problems,” Acampora added.

Acampora further stated the market might not hit 20,000 for another 6 years, but we will be the superpower that we are.

Bartiromo questioned Acampora on points he raised in a previous interview regarding the stages a bull market goes through and asked him to comment on what phase this bull market is in. Acampora said we are definitely not in phase 3, the speculative and complacency phase, because he sees no speculation whatsoever.

Acampora said the impressive thing about this market has been the sector rotation. Technology stocks which have been dormant are really starting to take over, he added.

Acampora said it looks like we are on the cusp of the market shifting from phase 1 (disbelief) to phase 2 (trust). “I love it when people keep talking this market down, and we haven’t even talked about the public being all in cash and money markets and Treasuries,” Acampora said. “Maria this has got a long way to go,” he reiterated.

Acampora commented on the volume on the NYSE and the participation in the market by professionals and the public. “The volume, if you’re lucky on the NYSE, runs about 600 to 700 million shares a day…in the good old days it was 1.5 billion shares as day, and that other 50% was definitely public and they’re not here,” Acampora stated.

Bartiromo asked what group (sector) Acampora would buy here, to which he replied, “technology…semiconductors…technically they’re all breaking out, they look fabulous.”

Back in late December, Acampora correctly predicted the market would rocket higher following a fiscal cliff deal [link].

Quantifiable Edges discovered there have been 14 instances since 1961 where the market was higher for six consecutive months. Surprisingly, in every single instance the market was positive 10 months later. The gains ranged from one percent to 21 percent.

A closer look at the data, generously provided at the Quantifiable Edges site, shows there were three significant drawdowns of over 10% during the subsequent 10 month period, but none that qualified as a traditional bear market drop of 20 percent or more. The largest drop within the 10 month period was 16.7% following the six consecutive monthly positive period ending April 30, 1998, although the market turned around and ended up gaining 11.4% after 10 months in that instance.

Below is data from the Quantifiable Edges website:

SMA Comment: Recently I’ve expressed the belief that the bull market was likely ending [link]. This data comes as a surprise to me, and is certainly reassuring for those looking for further gains, but only serves as a statistical anomaly that is due to be proven wrong at some point. However, it is admittedly difficult to buck something that has worked 14 times in row. The SMA Portfolio is at its most conservative allocation ever, but a market correction of over 10% would likely result in a Tactical Timing System buy signal and a partial re-entry into equities. Despite the statistical evidence to the contrary, I continue to expect that a significant correction (10% or more), if not outright bear market, is a high probability over the next six months.

Source: Quantifiable Edges

Hulbert said the statistical evidence for selling in May was surprisingly strong, in fact, “it’s incredibly strong,” he stated.

“We all think its silly..why does the market follow a seasonal pattern?…but statisticians have looked back 108 years, as far back as stock markets exist…there was evidence of it 80 years ago,” Hulbert stated.

Wapner asked, “but how many instances, when you look back, do you have central bankers greasing the wheels of global markets?” Hulbert indicated there would have been instances in the past where central banks were easing.

Hulbert said no one knows why selling in May works, but there have been various hypotheses put forth.

Hulbert said there are certain sectors demonstrating immunity to the market weakness exhibited from May through Halloween (consumer goods, technology, financial services, and telecommunications). Some participants have used the strategy of shifting to the more stable sectors during the May through October period, Hulbert added.

A couple of months ago Hulbert said the market had never “rolled over and died” after hitting a new high following a bear market [link].

Position (Symbol)
BT Group (BT)
Exxon Mobil (XOM)
Marathon Petroleum (MPC)
30% of the position in Pfizer (PFE)
33% of the position in Rayonier (RYN)
Weyerhaeuser (WY)

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Target Allocation:

15% equities; 85% fixed income
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SMA Comment: As mentioned from the sell signal over a year ago [link], investors continue to be forced into the high risk game of chasing equities and high yield bonds by a Fed bent on subsidizing debt while punishing savers in its endless attempts to jump start anemic economic growth. This insidious policy has created a dichotomy in risk assets where anything with yield is rising up to the stratosphere in an unrelenting tide of increasing optimism, while non-yielding securities merely appreciate at a measured pace, and commodities/precious metals producers wither.

Economic data has been below expectations which has not translated into a meaningful reaction by the stock market. There is precedent where investors disregarded economic warning signals and continued to plow money into risk assets. In 2007 housing was clearly at an unsustainable peak, subprime loans were imploding, while many financial “gurus” in the popular media continued to “whistle past the graveyard” [link].

Corporate profit margins continue to be elevated and a reversion to the mean could result in a difficult environment for equities and junky fixed income.

Caution continues to be warranted, although admittedly difficult to maintain.

UPDATE: Below is an image of the trade confirmations:

Information on the Tactical Timing System (TTS): TTS is a proprietary timing system based on research conducted over 20 years. TTS adjusts allocation between equities and bonds by 15 percentage points when timing signals are given. Signals are based on a combination of fundamental valuation measures and real-time sentiment gauges. To receive e-mail notification of timing signals send an e-mail to stockmarketadvantage@gmail.com and type “Subscribe” in the subject block. Subscribers will not receive spam messages.

Disclaimer: It is challenging to outperform a buy and hold strategy. Many investors have found themselves well served over long time horizons by investing regularly in a diversified portfolio of stocks or low cost, broadly diversified indexed stock funds. Information presented at this website is based on analysis of past data and assessments by the Tactical Timing System model. Future performance may not reflect past performance. Profitable trades are not guaranteed. No system or methodology ensures stock market profits. Although accuracy is strived for, no guarantee is made regarding the accuracy of data presented.