Being an active participant in the equity markets, I follow the US and global markets quite closely. What has stunned most market observers, including me, is the one-way market that keeps going higher and higher completely ignoring scary fundamentals—sovereign debt crisis in key European nations, continued softness in US housing market, deleveraging of the US consumers, high unemployment rate and so on and on. Pundits call this slow march to new 52-wk highs as “melt-up.” I see it as Fed-enabled, liquidity-driven market where bears have simply lost the mojo to short this market. Every small dip has been seen as a “bear trap”, which is a Wall Street jargon for drawing the bears out of their hide-outs with a dip in the market only for the bulls to come in full force, reversing the trend and forcing the bears to cover their short positions.
Well, there are great many commentaries all over the web and on print media as to why the market is going higher or why it should be going down or why it will continue to go higher and so on. So, I will not dwell on it. What I wish to do is share with you some key data that depicts the tremendous run-up in the US and global markets and various individual sectors. It is simply astounding. Table below shows the ETFs that track major stock indexes of key developed and emerging nations:
World Market ETFs (as of 4/09/2010)
| Symbol | Price | Change | 52-wk |
| USA (SPY) | 119.55 | 0.66% | +41.53% |
| Canada (EWC) | 28.62 | 0.56% | +61.11% |
| Russia (TRF) | 21.07 | 0.81% | +75.58% |
| India (IFN) | 32.83 | 0.74% | +67.33% |
| Israel (ISL) | 16.85 | 0.30% | +95.25% |
| Japan (EWJ) | 10.64 | 0.28% | +27.29% |
| Singapore (EWS) | 11.88 | 0.68% | +75.67% |
| Taiwan (EWT) | 13.01 | 0.62% | +48.49% |
| S. Korea (EWY) | 52.05 | -0.04% | +60.57% |
| S. Africa (EZA) | 62.19 | 0.34% | +64.51% |
| China (FXI) | 44.59 | 1.87% | +41.99% |
| Lat.America (ILF) | 49.78 | 0.69% | +70.00% |
Except Japan, every other market has seen more than 40% rise in the last 52 weeks and stand at the above closing prices as shown, as of April 09, 2010 (“Change” column shows the weekly change in these ETFs). Israel ETF is up by a whopping 95%! This is incredible growth in the face of all the issues that continue to linger in the aftermath of global financial crisis.
Here is another Table that shows the individual sector performance in the US equity markets:
Sector ETFs (as of 4/09/2010):
| Symbol | Price | Change | 52-wk |
| Oil Service (OIH) | 126.31 | 0.03% | +54.35% |
| Big Pharma (PPH) | 66.01 | 0.33% | +30.21% |
| Internet (HHH) | 62.69 | 0.21% | +63.40% |
| Semis (PSI) | 14.15 | 0.57% | +40.75% |
| Utilities (XLU) | 30.24 | 0.73% | +19.94% |
| Defence (PPA) | 18.84 | 0.77% | +49.34% |
| Nanotech (PXN) | 10.38 | -0.19% | +35.63% |
| Alt. Energy (PBW) | 10.08 | -0.69% | +17.89% |
| Water (PHO) | 17.81 | 0.34% | +36.72% |
| Insuarance (PIC) | 15.54 | -0.38% | +31.57% |
| Biotech (PBE) | 19.7 | 0.20% | +53.67% |
| Retail (PMR) | 18.5 | 0.49% | +31.73% |
| Software (PSJ) | 22.39 | 0.86% | +49.37% |
| Big Tech (QQQQ) | 49.03 | 0.59% | +49.60% |
| Construction (PKB) | 13.01 | 1.17% | +27.60% |
| Media (PBS) | 13.56 | 1.19% | +79.91% |
| Consumer Svcs (IYC) | 62.74 | 0.64% | +48.71% |
| Financials (IYF) | 59.16 | 0.51% | +53.94% |
| Health Care (IYH) | 66.31 | 0.39% | +36.82% |
| Industrials (IYJ) | 59.53 | 0.69% | +56.59% |
| Basic Mat (IYM) | 66.08 | 0.32% | +71.58% |
| Real Estate (IYR) | 51.79 | 1.58% | +77.63% |
| Transportation (IYT) | 81.25 | 1.08% | +54.99% |
| Telecom (IYZ) | 20.48 | 0.59% | +24.06% |
(data source: www.growthstockwire.com)
Every sector has seen incredible moves to the upside. Basic Materials (IYM) is up by 71% while Real Estate (IYR) is up by 77%!
So, as my title suggests, is it time to short this market? Other than the fact that there is still a lot of cash on the sidelines and Q1 earnings are expected to be great, year-over year (YOY, easy comparisons with Q1 of 2009), we still have many of the headwinds I mentioned earlier, intact. The fact that there is the possibility of yields on the long-terms bonds (10-yr bond yields briefly touched 4.00% after a long time this week) going higher, forewarns us the threat of higher cost of capital for both the US government and the US businesses. While the US companies boast superior balance sheets with more than a trillion dollars in cash, the gains over cost-cutting has reached its peak at then end of Q4 of 2009. So, further EPS growth has to come from top line growth and that depends on growth in exports and US consumers stepping back into the game. I feel, and many markets experts concur, that rising USD may have an adverse impact on US exports, while debt-laden US consumer, faced with a weak job market, may only show up briefly (the proverbial “pent-up demand”) before withdrawing into his shell.
So, I feel the market is ripe for a 20% correction. Why such a huge correction? Once the profit-taking starts in the midst of this “great” earnings season (market has already discounted this improved YOY earnings), many of the aforementioned problems will look much larger and the herd behavior, the fear of losing the accumulated profits, will lead to a self-sustaining downward spiral. And, most of the positives that have helped sustain this rally in the form of improving economic data (lot of it is built on the back of government stimulus and Fed easy money) will plateau. Add to that, the end to Fed’s MBS (mortgage-backed-securities) purchase coupled with rising long-term rates will stall any improvement in housing market.
So, there are strong headwinds. Therefore, I feel the market will head lower from third week of April. There will be a broad market decline with every one of the sector ETFs shown above becoming a prime candidate for shorting. Of course, this is not for the faint hearted. If the majority of the companies provide great guidance for quarters ahead and job market improves dramatically (200k – 300k jobs added every month), then the stock market will propel upward. Either way, there will be a strong inflection point in the near future. We will take a look at these ETFs at the end of the second quarter and grade this market call then.
No comments:
Post a Comment