The Stock And Bond Markets: A Critical Time

A CNBC survey asked 14 global market strategists to give their year-end target for the S&P 500 index. The lowest forecast was for 2,150 (close on May 28 was around 2120.) Most of the other forecasts were just below 2,300, while a number were above that level.

We remember a Barron’s survey of top institutional money managers in early 2008, just before the global crisis. Not one of them forecasted a decline in the stock market for the year, but the year saw the greatest global crisis since 1929.

They were obviously all very, very wrong.

That’s normally what happens when everyone is on one side of the fence. Could they be wrong again?

Last year, 95% of the profits of S&P 500 stocks were used for stock buybacks or dividends. That leaves very little for capital investments.

The general attitude of money managers, even as they read some warning signals, is that they will be the first to exit when the plug is pulled. They are depending on financial engineering to continue and the Federal Reserve to be accommodative.

The question is: will the positive forces continue to outweigh the negatives, and for how much longer?

Buybacks: the unprecedented amount of money going into stock buybacks of companies is the biggest source of buying, overwhelming all others combined. This year, the market is on track to have more than $1 TRILLION going into stock buybacks. That is almost unimaginable.

However, it is confined to the companies doing the buybacks. That explains why, with several major stock market indices again near record highs, the number of “new 12-month highs” in the stock market are so low. That’s a huge negative divergence we follow closely

Central Banks:  The central banks of the world, Europe, Japan, China, and the Fed are all pursuing the same policies now: create trillions of dollars of artificial money. This propels the stock markets, ‘hopefully’ creating a “wealth effect,” with some of the money ‘hopefully’ going into the economy to create jobs. Some people think the Fed has stopped. Wrong! The Fed is still using the money released from maturing bonds to buy more bonds. Therefore, the QE even continues in the US.

China:  The latest stimulus package was announced by China. This is very important as it may have given the bull markets of the world new life … at least for a while.  The China stimulus, and apparent 180-degree reversal in a policy it had discussed numerous times over the last year, is very important. China has accounted for the major growth portions of consumption of commodities and oil over the last 15 years. But what happens when the speculative bubble in China deflates?

Above you have some of the major bullish factors for the stock market, not the economy. In our WELLINGTON LETTER, we have a thorough discussion of all the negatives as well. Here are just a few. They have even greater importance for your portfolio! You might be surprised at what is really happening, not what Wall Street wants you to believe.

Most stocks not following upward:  The NYSE COMPOSITE INDEX, which includes all the stocks on the NYSE and thus is more important than the S&P 500, on May 26 was below the level of July 3, 2014, almost one year ago. That’s the true state of the market, not record highs.

The new 12-month highs on the NYSE are now below 100, whereas they should be around 700-800 with major indices at new highs. It shows that the majority of stocks are not following and that this is a “promoted rally” designed to give the illusion of market strength.

Divergences: There are many negative divergences in our technical indicators, and the major indices. The DJ Transports just made a new 6-month low, while the S&P 500 made a new record-high. At tops, the DJT is more important.

The US economy is now on the border of a recession, fulfilling our forecast of last year for 2015, when Wall Street economists were forecasting strong 4%-4.5% GDP growth for this year. On May 29, the new estimate for GDP came in at negative growth of 0.7%. If the second quarter GDP also is negative, it would be a recession.

Corporate profits so far this year are barely up, versus the dubious forecasts by Wall Street last year of 15% profit growth in 2015. Yet, two of the major indices just made new record highs.

Wall Street pretends all this is not important. Our WELLINGTON LETTER forecasts have been right on target again. Contrarian forecasts and deep analysis is what we have delivered for over 37 years.

Our advice is always to avoid the big losses and the profits will come by themselves. It’s the negatives you rarely hear from Wall Street. But we have no conflicts of interest and no advertisers to please. We have predicted every major market plunge and bear market in the last 37 years.

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Bert Dohmen, Founder
Dohmen Capital Research, Inc.