Stocks Are Overvalued, Overbought, & Over-Loved

I have received a number of emails from members who appear confused with what they see as contradictory comments about equities.  I’m asked how I could be so bearish on the general economy and the quality of the current move while I remain invested in the market.  The answer is simple – the market is headed toward a speculative blow-off top and I’m just trying to capture some of the move without risking too much capital.  I don’t for a second believe that the current move is sustainable, and I do not believe we’ve entered into a new secular bull market.

The current market is now reminiscent of the late 1990s “dot com” bubble, with companies going public as quickly as they can.  The market is paying ridiculous premiums for low quality issues as companies rush to take advantage of booming prices and speculative demand.  Already this year, 42 companies have gone public, matching the amount at the start of 2007.  The only year with more IPOs was 2000.  It’s not by coincidence that both 2000 and 2007 were peak IPO years, as they both coincided with massive cyclical market peaks.  Now, 6 years later, the markets are again headed to such a peak.

With corporate earnings relatively flat and an economy still waiting to turn the corner, the surge in IPO’s is telling.  It highlights the speculative nature of the current market, with hot capital now forced to chase lower quality and higher risk offerings.  The retail crowd has pushed 401k holdings firmly back into equities, while raising margin debt to record levels.  The presence of these 3 occurrences (IPO’s, Equity Exposure, Margin Debt) is indicative of a cyclical market top.

There isn’t a bear left to sell this market – they’ve all capitulated.  That happens at all cyclical peaks, and this one is no exception.  The lack of a decent pullback, along with a near-vertical rise in prices, have made the current cyclical bull market extremely hard on the bears.  Short interest has fallen to extremely low levels and we’re left with a market that is being driven purely by speculative greed.  Everyone is afraid to leave the party for fear of missing a portion of the move.  At some point soon, however, the party will end – abruptly – and the rush to exit will be overwhelming.

Stocks are grossly overvalued, overbought, and over-loved.  The argument is that this time may be different, but we know that every cyclical top is characterized by a version of the “this time is different” meme.   The critical question is whether the current gross over-valuation means that a correction is imminent.  At this point in the Cycle, the answer appears to be “no”.  The opportunity for a massive drop occurred with the last IC top, but we now are faced with a bullish window – it will be some time before a sudden fall becomes a concern.  That said, a market this overvalued and extended should never be trusted.