Technical Strategist Ross: Stocks Show Signs of Topping Out

Thursday, 21 Aug 2014 08:28 AM

By Dan Weil

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The S&P 500 has climbed 4.2 percent from its Aug. 7 low to Wednesday's close of 1,986.50. The gauge touched 1,988.57, briefly surpassing its previous closing high of 1,987.98, before pulling back.

But the market's very strength could actually represent its weakness, says Richard Ross, technical strategist at Auerbach Grayson.

He points out to CNBC/Yahoo Finance that the S&P 500 now sits almost 400 points above its 150-week moving average and has stood above that benchmark since 2010. In addition, each of the S&P 500's 10 sectors has risen this year.

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"Clearly, this is still a bull market. But we often see strong price action at market tops. In fact, that’s why they are tops," Ross said.

"People don’t like to hear that at some point, the market will go lower. But that’s a fact, and I think that the closer we get to those big psychological levels like 2,000, the closer we are to a market top."

And what could spark a drop?

"Europe already is eroding," Ross said. The eurozone economy registered zero growth in the second quarter.

"Commodities are eroding. Interest rates have reached climactic lows. And emerging market currencies are already weakening," Ross said.

Meanwhile, Nobel laureate economist Robert Shiller of Yale University isn't sure what to make of the stock market's lofty values. Stocks have been expensive for almost all of the last 20 years, according to his cyclically-adjusted price-earnings ratio, which uses 10 years of earnings.

"Nothing I’ve come up with is a slam-dunk explanation," Shiller writes in The New York Times. "I suspect that the real answers lie largely in the realm of sociology and social psychology — in phenomena like irrational exuberance, which, eventually, has always faded before."

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