---- a *must* read ----

  1. dub
    33,892 Posts.
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    November 12, 2003

    In fact, market participants should be increasingly alarmed by the fact that tech stocks are outperforming. For one thing, from a profit perspective they’re some of the worst stocks out there. Should they be rising the most? Of course not. Why are they? Speculation. All the tech stock losers hoping to make their fortunes back and gambling on yesterday’s "big thing" instead of looking for the next big thing.

    While the public flocks to yesterday’s winners, Thomson Financial reports that insider sales have hit a new record. Last month’s ratio of sales to buys hit a whopping 59 to 1.

    That surpassed the previous record of 41 to 1, set in May of 2001, by a mile. That’s 59 shares sold for every one share purchased.

    Insiders are unloading stock at record levels while the public gobbles them up and drives the indices barely higher! Who’s side do YOU want to be on?

    The folks at Investors Intelligence tell us that proportion of bulls stands at over 50% for the 25th consecutive week, a feat never matched in the entire 40 years of the survey’s existence. Meanwhile a recent Barron’s survey demonstrates that amongst professional money managers, bulls outnumber bears by 5 to 1.

    Come on folks! Let’s get real here, ok? Insiders are bailing on stocks and the public is MORE bullish than it was at the PEAK of the greatest bull market bubble of all time. Do you really believe that there’s a lot of upside to be had from here? When the p/e ratio of the S&P 500 stands at just under 35? If I’m not mistaken, that’s another record!

    Bulls at record highs, valuations at record highs, insider sales at record highs: the makings of a fledgling bull? Yeah right!

    Listen folks, I’m not Mr. PermaBear singing his same old tired tune. When the S&P 500 busted out above 965 I was figuring on a major bullish move and my tune shifted to "buy". I’m bullish when the market is acting bullish. But this one isn’t. Under the surface of headline-grabbing new highs lurk increasing signs of weakness and waning momentum.

    That’s not what you want to see in a legitimate bull. New highs should be drawing in more buyers. We should be seeing increasing upside momentum. Instead we’ve been watching a dismally boring struggle to claw out marginal gains for the past three months.

    But here’s what should really have the bulls scanning for the exits. I’ve discussed before how the rally has already priced in a very rosy economic future. And the news recently came out: GDP growth at a 19-year record! Unemployment figures improving for the third consecutive month! Tech-darling Cisco posting mighty impressive results.

    And where’s the market? Barely changed from where it was before the news came out.

    The character of the market is changing. For quite a while we’ve seen it ignore bad news and rally on positive news. It’s still not terribly upset over bad news, but the good news seems to have lost its magic.

    If great news isn’t going to rally this market further, WHAT WILL?

    If it took thirteen rate cuts, three tax cuts and massive money supply expansion to finally give us one quarter of decent growth and a few hundred points on the S&P 500, WHAT’S IT GONNA’ TAKE TO KEEP THIS RALLY GOING?

    My point is this: yeah, we got a decent rally. Yeah, we got some decent growth in the third quarter. But what did it take to create that? Massive fiscal stimulus. The kind of stuff that CANNOT be sustained. The only hope is that all this stimulus will push the economy over the edge and ignite a self-sustaining recovery. Will that happen? We shall see. But I’m not betting on it.

    Why not? Same story I’ve been telling for a while: the latest economic slowdown has NOT done the work of generating a foundation for sustained recovery. Consumers are MORE in debt than ever. Corporate profits have been boosted by cutting costs and laying off workers. In John Challenger’s words, "We put so much stimulus into the economy in the third quarter that the economy grew at its fastest pace since 1984. And yet there was a net job loss of 50,000 jobs in the third quarter."

    If this is a genuine recovery it should be generating hundreds of thousands of new jobs monthly. It’s not. So we’re left with a bunch of mega-indebted consumers who still aren’t finding jobs. This is to be the fertile ground from which the seeds of sustained economic growth are to spring forth? Good luck!

    But in the short-run, I’m not going to argue too much with this mini-bull market. Stocks were overpriced for years before finally topping out in 2000. Never try to call a top when gains are being made on irrational exuberance and whacked-out psychology. But this game isn’t about callings tops and bottoms. It’s about taking positions when the odds are in your favor, when potential reward outweighs potential risk.

    Take a look around you folks: insiders dumping stock at a frenzied, record-setting pace, investors more bullish than ever, an economic recovery that steadfastly refuses to do the one thing a recovery is supposed to do – generate jobs. Where do you think the risk is in this market? In missing out on huge upside gains? Or getting caught buying inches away from the ultimate top?

    After last Friday’s action I suspect we’re on the verge of yet another correction, even while the last upswing failed to gain much ground. Will it market the top of the mini-bull? I don’t know. But I’m willing to bet that we’re MUCH MUCH closer to the top than we are the bottom. And that makes this market a risky proposition indeed.

    (Copyright 2003 by Mark M. Rostenko and The Sovereign Strategist)



    Be careful, eh.

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