Where Prices Clash with Belief (TROW,STT)
There’s a disconnect today between, on the one hand, what the ‘experts’ are saying the market is supposed to do, and on the other, what it’s actually doing.
The bigshots say we’re overextended and are due for a pullback, and they have a great deal of evidence to present to the judge. Most notably, in our opinion, the following –
The above chart shows corporate insider buying/selling for the last three years, and as you can see, it’s just recently posted new lows. January was the worst buying month since 1988 and February’s ratio of buyers to sellers was the lowest insider buy/sell ratio in the last three decades.
This, the experts say, is indicative of something big in the making. And they have a point.
Insider buying is a more meaningful indicator than insider selling, because when CEO Tompkins has to buy a new house for little Baxter or has to help little Angelina get married or go through Wellesley or Smith or whatever, then he’s got to sell his stock to raise funds.
That doesn’t mean he’s necessarily bearish on the prospects of the company or in any way concerned about where his stock is headed. He just needs some money.
Not so the insider buyer, who rarely exercises his prerogative to purchase unless he sees a more golden future for the company’s shares.
It follows, then, that a wealth of insider buying is a great omen for the market, and a dearth, a fairly reliable sell indicator.
And now? The worst insider buy read in three decades?
It’s a negative.
Beyond that, what analysts and technicians call ‘market breadth’ is also showing signs of cracking.
With the market sitting just below all-time highs, companies posting new lows on the NYSE last week overtook new highs. And that’s a troubling development. It essentially means that the push past 21,000 on the Dow is a result of very thin breadth, with fewer and fewer companies accounting for the surge.
So why does it keep rising?
On the other hand, we see that the market has not yet ceased its inexorable post-Trump advance. It has slowed over the last two weeks, to be sure, but the NASDAQ 100, for example, still managed to post another all-time closing high yesterday, despite the rest of the indexes grinding sideways.
And so the question has to be asked: what exactly is the market trying to tell us when all the smart-alecs are saying the top is in, and we could be moving toward a significant and imminent decline, and, at the same time, that decline refuses to materialize?
Our take is as follows.
We believe that the current trend higher could continue for longer than many expect, and we’ll outline our reasons for that in a moment. We also believe that the disconnect we’ve illustrated above portends a meaningful change in the way markets trade as we approach the final blowoff top.
What Sort of Change?
We believe that a tidal inflow of funds into equities is about to occur and will continue to wash this way until inflation spikes IN SPECTACULARLY CRUEL FASHION, and, ultimately, faith in the dollar collapses. We believe this will happen because –
- The Fed is now behind the curve and will be forced to ratchet up rates in panicked fashion,
- Money will gush from the bond market into stocks in order to play catch-up for all those years of little or even negative real interest earned, and
- Masive quantities of foreign funds will also surge toward our shores in order to participate in the GREATEST SHOW ON EARTH, formerly a Ringling Brothers and Barnum and Bailey Circus slogan, now more appropriate for use by the NYSE.
Our job at the end of the day will be to pull out of this circus with a significant enough stash of cash to begin buying real assets, but not to wait too late – that is, not until such time as the dollar no longer has any more purchasing power, let alone legitimacy.
We’ll be stocking up on necessities at that time, too, the better to weather what may be an extended period of drought.
BE WELL AWARE: the force of inflation, first loosed upon these shores by the Fed’s response to the 2008 Lehman Bros. meltdown, will have a devastating effect on both the market and the economy. And we’ll only know we’re approaching the endgame when short term rates begin to approach double digits, though it’s impossible to say today with any certainty that that will be the case. All our current projections on that end time, as it were, as with so much in finance, are moving targets and will have to be determined in conjunction with a host of other indicators and trends as we move forward.
In the meantime?
We see great improvement on the employment front. Last week’s ADP numbers show their best advance in a full six years …
…particularly in the ‘Goods-Producing’ field, that last month accounted for the lion’s share of job growth.
We see also that household wealth (relative to income) is now at its highest level ever!
The greatest portion of the gains here come from higher home and stock prices, to be sure, but it matters little – however it comes, it bodes well for the further advances in the stock market.
Finally, as we mentioned earlier, we already see all sorts of new cash streaming into equities – particularly ETFs.
Since the beginning of the year, a whopping $106 billion has coursed into U.S. ETFs, while $24 billion has left mutual funds. All told, the last ten weeks of inflows have even outpaced the flow into bonds ($79 billion).
And it’s only the beginning.
Make us some money, Huey!
This weeks’ trade is a bet that the ETF industry will outperform the active asset managers of the mutual fund industry.
And we’re using two well-known companies to do it: on the one hand, State Street Advisors (NYSE:STT), operators of the very popular SPDR ETFs, and on the other, T.Rowe Price (NASDAQ:TROW), purveyors of a wide array of mutual funds.
And here’s how they stack up for the last half year –
Since the Brexit vote in June, the outperformance has been astounding. And we believe it will continue.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
And you get two full months play on the long option!
With kind regards,
Hugh L. O’Haynew