{"id":33817,"date":"2012-11-29T01:15:12","date_gmt":"2012-11-29T06:15:12","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/11\/stock-market-rally-set-to-end-imminent-stock-crash\/"},"modified":"2012-11-29T07:40:33","modified_gmt":"2012-11-29T12:40:33","slug":"stock-market-rally-set-to-end-imminent-stock-crash","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/11\/29\/stock-market-rally-set-to-end-imminent-stock-crash\/","title":{"rendered":"Stock Market Rally Set to End: Imminent Stock Crash"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

Yet again our stock markets<\/strong> are completely beholden to the decisions of a few men. The \u2018fiscal cliff\u2019 negotiations are the only game in town.<\/p>\n

Last night the S+P 500 sold off through some important levels and looked pretty sick indeed, until US President Barack Obama and House of Representatives speaker John Boehner announced that they both felt confident that a deal would be reached sooner rather than later.<\/p>\n

Suddenly, stocks spun on a dime and shot higher.
\nThey rallied nearly 2% from the lows that they were trading at just before the announcement.<\/p>\n

It almost feels like they time the announcements based on where stocks are trading. It wouldn\u2019t surprise me if they really did\u2026<\/p>\n

\u2018Excuse me Mr President, but the stock market is currently down over one per cent. Could you make an announcement that the talks are going well? We\u2019d really like stocks to finish in the green today.\u2019<\/p>\n

Perhaps my cynicism is going a little too far, but I feel confident that keeping the stock market<\/a> afloat is top of mind for both the government and the Federal Reserve.<\/p>\n

Fed chairman Ben Bernanke has quite frankly stated that the wealth effect from a rising stock market is something he\u2019s trying to achieve through his relentless money printing.<\/p>\n

For a bear like me this can make trading the stock market<\/strong> incredibly frustrating. I\u2019m quite literally \u2018fighting the Fed\u2019. This is something most stock market pundits will say is suicide.<\/p>\n

But as far as I am concerned the higher they coax the stock market the further it has to fall when reality strikes\u2026<\/p>\n

I read an interesting article by John Hussman on Mish\u2019s global economic analysis blog (My favourite site for economic analysis) that stated:<\/p>\n


\n\u2018Our estimates of prospective stock market return\/risk, on a blended horizon from 2-weeks to 18-months, remains among the most negative that we\u2019ve observed in a century of market data.<\/em><\/p>\n

\u2018On the valuation front, Wall Street has been lulled into complacency by record profit margins born of extreme fiscal deficits and depressed savings rates. Profits as a share of GDP are presently about 70% above their historical norm, and profit margins have historically been highly sensitive to cyclical fluctuations. So the seemingly benign ratio of \u201cprice to forward operating earnings\u201d is benign only because those forward operating earnings are far out of line with what could reasonably expected on a sustained long-term basis.<\/p>\n

\u2018On the basis of smooth fundamentals such as revenues, book values, dividends and cyclically-adjusted earnings, the S&P 500 is somewhere between 40-70% above pre-bubble valuation norms, depending on the measure. That\u2019s about the same point they reached at the beginning of the 1965-1982 secular bear period, as well as the 1987 peak.\u2019<\/p>\n

\u2018We remain convinced that stocks are richly valued here. A fairly run-of-the-mill normalization of valuations in the course of the present market cycle would imply bear market losses of about one-third of the market\u2019s value, without even establishing significant undervaluation. Then again, there\u2019s no assurance that valuations will normalize, or that stocks will experience a bear market here. Maybe Wall Street is correct that profit margins will remain forever elevated and The New Global Economy\u2122 will never again witness \u201cnormal\u201d valuations on these measures at all. There\u2019s no shortage of analysts who effectively embrace that view by focusing only on forward-operating earnings.\u2019<\/p><\/blockquote>\n

Hussman is obviously talking about the very big picture there, and it would be foolish to actually trade the stock market today based on that view alone. The difficulty, as always, is in the timing.<\/p>\n

Is Now the Time to Short Sell the Stock Market?<\/center> <\/p>\n

Our resident small-cap fanatic, Kris Sayce<\/a>, says no. He\u2019s been in the stock market for the past few months telling his readers to punt on small-cap stocks<\/a>, as many of them hit new low points. His view is that because of the big gains on offer, you only have to allocate a small part of your savings in order to get a big return.<\/p>\n

And if things don\u2019t work out, well, you\u2019ve only lost a small amount of cash.<\/p>\n

But I look at the stock market differently. My role isn\u2019t to help traders with a small part of their wealth. I\u2019m helping them manage their entire trading portfolio, which is usually many times larger than a small-cap portfolio<\/a>.<\/p>\n

And one thing I\u2019m looking at currently which I find interesting is the deterioration in new capital goods orders (technically defined as the year over year change in Non-defence capital goods excluding aircraft):<\/p>\n

Manufacturers\u2019 New Orders<\/center> <\/p>\n
\"Manufacturers'<\/div>\n

The reason I find the recent fall so interesting is that this chart looks eerily similar to the long term chart of the S+P 500:<\/p>\n

S+P 500 Monthly Chart<\/center> <\/p>\n
\"S+P<\/div>\n

 <\/p>\n

Source: Slipstream Trader<\/div>\n

 <\/p>\n

The only real difference between the two is that new orders have already rolled over and are falling, whereas the stock market is still near the highs. If I was a betting man I would have to say that the stock market is close to following the new orders chart lower.<\/p>\n

Also it\u2019s interesting to note that new orders haven\u2019t had such a steep decline in the last 30 years without a concurrent recession, as noted in ZeroHedge.<\/p>\n

When looking at the above my conviction increases that we may be getting close to a fairly sizeable fall in the stock market.<\/p>\n

We may have seen a big spike in the stock market last night on hopes that the fiscal cliff issue will be resolved, but the fact is the Democrats and Republicans are still miles apart. If you\u2019re interested in knowing where they actually stand then this quote from ZeroHedge gives you a good insight into where things are really at:<\/p>\n

 <\/p>\n

\u2018Any deal on the cliff requires an acceptance of the relative role of revenues and outlays in closing the budget gap. The official positions of the major players are miles apart. President Obama has proposed a roughly $4 trillion 10-year deficit reduction plan<\/strong> that is $1.5 trillion (or 40%) tax increases, mainly from allowing the Bush tax cuts to expire for upper income households. His plan has been roundly rejected by Republicans<\/strong>. They argue that most of the spending cuts are not real: his $4 trillion includes almost a trillion in savings that were already agreed to in the first part of the debt-ceiling agreement and almost another trillion in savings from the winding down of the war in Afghanistan. Stripping those items out, the tax increases become three-fourths of a $2 trillion deficit reduction plan.<\/p>\n

\u2018By contrast, the two main House Republicans, speaker Boehner and Budget Committee chairman Paul Ryan, have suggested that spending cuts should account for all or the vast majority of the cuts.<\/strong> In his negotiations with the President in 2011, Speaker Boehner was apparently close to agreeing in principle on $0.8 trillion in tax increases, or 20% of a $4 trillion dollar plan. However, that deal quickly fell apart once it began to be fleshed out and vetted with the rank and file members in Congress. Moreover, the plan\u2019s reliance on \u201cdynamic scoring\u201d- raising revenues by stimulating growth-has already been strongly rejected by Democrats. Paul Ryan has offered budgets in each of the last two years that include dramatic cuts in spending \u2013 including effectively eliminating all of non-defense discretionary spending \u2013 but no increase in taxes.<\/p>\n

\u2018To reach a deal, the two parties must not only bridge a huge gap in terms of the tax share-somewhere between 0% and 75% \u2013 they must also agree on the same accounting system.<\/strong><\/p>\n

A big precedent<\/strong><\/p>\n

\u2018The outcome in this initial round of negotiations could set the tone for future deals:<\/p>\n