S&P 500: Over-valued?

Warren Buffet has always said, "Be fearful when others are greedy, and be greedy when others are fearful." That statement could not have been better applied to anything but the overall market and the S&P 500 today. The S&P 500 has skyrocketed 14.42% YTD, and bullish sentiment does not seem to be weakening. This appears to be very worrisome. The 50+ year average return of the S&P 500 anually is 11%. The S&P 500 has blown past that average in 24 days, not even a month!

Anytime you see a excessive bull run, the state of euphoric buying inevitably begins to fade, and the rally typically begins to turn south, and fast. I can see no real logical reason for the market to be behaving this way. There are simply still too many macro-economic issues that have not been solved (dollar falling in value, housing market falling still, unemployment still un-changed, etc.) for investors to have any rational reason to be so optimistic toward the equity markets.

Above is the S&P 500 charted. There are so many technical-analysis indicators pointing toward the index being very over-bought and due for a pullback, that I cannot fit them all on the chart. It suggests a bearish correction and soon. Here are some of the signs.

• The RSI indicator is about to break 70, which is a very over-bought signal.
• The Bollinger bands have contracted significantly, which means a major market trend is about to occur. Since the Index's candlesticks have been hugging the upper band, that points toward it being ready for a trend reversal from bullish to bearish.
• The MFI shows that a much more than usual amount of capital has been dumped into the equities markets, which is a over-bought signal.
• The final nail in the coffin is the fact the MACD has fallen below the signal line, giving off a bearish signal.

So what does this all mean? All major technical indicators point toward a bearish trend reversal in the S&P 500. This recent bear market rally is due to bust. This recent bull run in the S&P is simply a behavioral reaction due to the herd mentality, affecting Wall Street traders/managers and investors right now. I expect that a correction will occur in two to three weeks.

Ways to hedge against a correction?

• Purchase Ultra-Short ETFS.
• Purchase energy/commodity ETFS, or contracts.
• Purchase put options on the major index funds.
• Move capital to a money market mutual fund, and wait to see where to re-allocate funds.

Gains of this speed historically lead to one conclusion. A painful forced awareness, in a price correction of over-bought assets. All the technical, fundamental, and macro indicators point toward this being an irrational false rally. Hopefully, the correction won't lead to a blood-in-the-streets sell-off on Wall Street. It's always possible that I could be wrong, but evidence and due-diligence suggests otherwise.

Goldman Sachs: Good Short Term Trade?

Goldman Sach's common stock had a signifigant pull back today, falling 4.69%, and to 4.98% afterhours. That is about 9 dollars per share. What are the reasons for this pullback? Here are some strong possibilities.

• GS Reported today, that earnings fell 53% in the fourth quarter, due to decrease of demand in its investment-banking and trading businesses.
• The whole facebook drama. Goldman decided to block U.S investors from investing in its FaceBook IPO (reason is still unkown), this has lead to a utter PR disaster for Goldman.
• Many top traders, and portfolio manager's, claim many technical indicators (VIX & trading algorithms) are giving off the first bearish signals since 2007 pointing towards a 10-15% trend downwards in equities (especially financials) starting at the end of the month.

Although these factors may represent a long term bearish outlook for goldman, im more interested in the short term. For a stock like Goldman, which has a large Market Cap 85 billion, as well as a large amount of shares, a moderate pullback like this may end up being seen as a buying oppotunity to many traders and investors. Goldman is expected to make a boat-load of cash on the FaceBook IPO, ive seen many traders on messege boards showing bullish sentiment towards Goldman as well.

From a Technical Analysis standpoint, heres what we got.

As you can see the 10 SMA is above the 30 EMA so GS is trending up. This indicates that the GS is still giving off bullish signals. The GS Jan 20 candle stick fell from the trend of hugging the upper bollinger band to touching the lower bollinger band. This leads me to believe that today's sell off is a behavioral reaction to the news today, and tomarrow traders and investors will see this as a opportunity to buy GS at a short-run discount. So i expect we will see a rise in GS share price by 2.5% to 4%. So for the short term trade, lets take advantage of purchasing GS at a discount and make money off the spread, when the stock recovers from the sell off earlier today.

Macro-Economic Outlook Analysis: Danger of Rising Oil & Commodity Prices.

The macro-economic environment right now is performing exactly as I described it would in October, when I questioned Andrew Sorkin at a Chapel lecture at a Pitt U campus. This is what I predicted on October 19:

• A devaluation of the USD currency before 2011
• The creation of a commodity drive, possibly a bubble, as speculators, fund managers, and hedge funds hedge their portfolios, increase their positions in commodities across they board in every sector to fight against falling equity prices, as well as inflation. (When our money depreciates in value, it takes more dollars to purchase the same amount of commodity.) So, in essence, when they purchase commodities during a time of inflation or fiat currency devaluation, they not only protect their clients' capital investment, they turn a profit for them as well.
• The resulting raise of direct fixed and variable input costs for manufatuers & services due to commodities increasing in price.
• Unemployment to stay at near same levels in the short-run, then increase substantially in the long-run.

Well now, lets see what happened.
  

(I use crude oil since it is typically the most important commodity to the infastructure of our economy, as well as a represenative hard asset purchased by those who wish to hedge against inflation. Most traders, fund managers and analysts use crude oil as the benchmark for the investor sentiment of commodities.)

Shortly after I made my predictions, warning signs of those predicions appeared. Early Novemeber, QE2 (Quantitative Easing Two) was implemented, which whether or not anyone in the FED or financial firms will admit,  is a devaluation in the governments ability to fix the economy, as well as the stimulus's failing to spur economic growth, and will most likely lead to a devaluation of our dollar.
So what is the purpose of this QE2?

• Force capital out of the bond & money markets, so investors will purchase equities.
• Lower T-bill & Treasury bond rates, mortage rates, etc.
• Make the equity markets rise in value.

Reason it has been implemented? Simple. The FED, as well as the politicians in Washington, want to artificially prop the equity markets up, so they can make the economy look like it's recovering. Shortly after commodities across the board began trending quickly upward. D.C and Bernanke & Co, may have created a POSSIBLE (nothing is for certain) future econmic crisis. Because of QE2 it has made the already terrible macro-economic conditions worse. Funds, managers, traders everywhere re-allocating funds and weight portoflios heavier towards commodities, especially crude oil. This is very worrisome and dangeous to the U.S and below is why.

The American consumer's purchasing power is still weak. We have an unemployment rate of nearly 10%, as well as the U.S economy and spending power of the U.S consumer still being very low. There is a very strong possibility that oil will pass $110 a barrel and push towards $120 a barrel. This rise in oil prices will put an even greater pressure on a already weak U.S economy. When oil & commodities rise in price, it takes more dollars to purchase the same amount of commodity, therefore acting as a tax on the U.S producers & consumers, destroying potential consumer purchasing power. Those same dollars could be used to purchase goods and services, but now instead will be spent on buying the gasoline.

What's even more striking is that gas is now past $3 dollars per gallon.Winter is usually the weakest time for gas prices. The recent surge in crude oil has raised the possibility that gasoline could hit $4 a gallon by summer, which is the peak driving season, as well as the highest demand season for gasoline. Gas prices that high would almost certainly destroy an already weak recovering market, as well as damage many services due to lack of consumers traveling and having less money to spend on products & services.

We are also seeing a rise of all manufacturing & services fixed and variable industrial input costs, which simply means that many business will have to in turn raise prices on the consumer. Businesses will react to this by cutting hours, labor, and laying off workers. Some businesses may have to close down, all leading to unemployment and less money being spent in the economy. Equities will fall in response to the loss in corporate earnings due to this rise of input costs and destruction of consumer spending on their goods.

What is just as worrisome is the direct upward movement of food price indices since QE2 was implemented.


All of these rises in commodities (oil, food, copper, precious medals) leads to one thing - long term bearish sentiment of the U.S macro-economy. Their rise in price will restrain the U.S economy from recovering, as well as possibly create another large drop in the equities markets. Based on these macro-economic factors as of now, I would be inclined to purchase commodity futures or commodity based ETF's profit in the short run, as well as hedge against a crash in equities induced by this upward trend of commodities. Hopefully, things will turn around, and commodities will fall, markets change direction quickly. However, current macro-economic analysis says otherwise.