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MarketWatch's Michael Sincere: Beware the 'Sucker' Rally in Stocks

By    |   Wednesday, 05 November 2014 12:16 PM

The current U.S. stock market rally is for "suckers," and there is ample proof it is hovering around an unsustainable record top, according to MarketWatch columnist Michael Sincere.

The recent rally back to all-time highs looks rickety to say the least, he noted.

"I hate to be a party pooper, but this is not a time to celebrate, but rather to be cautious," Sincere wrote.

For starters, he said, the big advance of 195 points on the Dow Jones Industrial Average last Friday, Oct. 31, that took it to record highs could have been a blow-off of sorts.

That's because only five stocks were primarily responsible for the jump that day.

Many stock observers believe that skinny breadth — when only a few stocks lead the markets higher — is a top-heavy phenomenon that can easily be reversed. Broad-based rallies, in which many stocks participate, is much preferred.

"Friday's surge was prompted by the Bank of Japan, which promised more stimuli (I'm guessing they are on QE 35, but who's counting?)," Sincere added.

Further, he stated, "On Friday, there were no plus-1000 ticks on the NYSE Tick, which tells you that the rally was another head-fake without institutional involvement. Typically, you will see at least four or five plus-1000 ticks on bullish days."

Another bad sign of the Dow's record Friday was that volume was low, especially for the last day of the month, a sign there were few participants driving stocks higher.

"Moreover, the S&P 500 that day did not rise above its overnight high, which is generally a sign of domestic weakness. During the day, it did not take out the previous all-time high. If this were a true bull market, breadth, volume and institutional presence would have been a lot stronger."

Finally, Sincere worried that only five out of 20 stocks led the Dow Jones Transportation Average — another bad sign, since Dow theorists prefer it when the Industrials and Transports move up broadly in tandem.

"If this were a broad-based rally, more of the transports would have participated," he said.

Sincere said one famous short-seller in history, Jesse Livermore, would have loved the current stock market environment. Livermore made a fortune in the 1929 crash after several money-losing attempts to ride the market lower in which he was too early.

"In 1929, with the market going into the stratosphere, it seemed like he was committing financial suicide. Don't forget that in 1929 the economy was in good shape, borrowing money was easy and there was a lot of liquidity with no sign of inflation. In fact, consumer prices were falling," Sincere noted, a situation somewhat similar to today.

Livermore watched as trendy high-beta stocks went higher and higher, but then finally faltered and failed to make new highs.

"Livermore made more money during the crash of 1929 that at any other time in his life," he noted. If he were alive today, "I'd bet he'd be sending out probes."

"In 2014, the market has reached all-time highs and many investors are wildly bullish. Most money managers are hoping for a year-end buying frenzy that will take the indexes even higher," Sincere wrote.

USA Today took a brighter view of the current stock market, noting that the month of November typically ushers in the best six-month period of the calendar for stock gains.

The newspaper noted that in the November-thru-April period since 1950, the Dow has managed average gains of 7.5 percent, compared with gains of only 0.3 percent for the worst six-month period, which runs from May thru October.

The months following mid-term elections are typically also positive for stocks, according to USA Today.

"Stocks have rallied post-election regardless of the political outcome . . . , suggesting that the elimination of uncertainty and an end to the political rhetoric is constructive for the markets," said Carmine Grigoli, chief investment strategist at Mizuho Securities USA.

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The current U.S. stock market rally is for "suckers," and there is ample proof it is hovering around an unsustainable record top, according to MarketWatch columnist Michael Sincere.
Sincere, Dow, stocks, rally
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2014-16-05
Wednesday, 05 November 2014 12:16 PM
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