Is it just me, or have investors completely abandoned the concept of risk and reward?
The reality of the situation is that the key stock indices are treading in shark-infested waters and the risks are piling up daily. I see bearish signals all over, but the theme among investors, even conservative investors, continues to be “keep buying.”
Margin debt – that’s the amount of money borrowed to purchase stocks – on the New York Stock Exchange (NYSE) reached its all-time high in April. Margin debt on the NYSE registered at $384.3 billion as the key stock indices hit new record-highs. (Source: New York Stock Exchange web site, last accessed May 29, 2013.) The highest margin debt ever reached prior to this was in July of 2007, when it stood just above $381.0 billion. At that time, just like today, the key stock indices were near their peaks and “buy now before it’s too late” was the prominent theme of the day
Looking ahead, corporate earnings, which ultimately drive the direction of the key stock indices, don’t look so good. So far, 106 companies in key stock indices like the S&P 500 have provided their corporate earnings outlooks for the second quarter, and more than 80% of them have issued earnings outlooks that are negative! Corporate earnings growth for the second quarter is now projected to be only 1.4% – and the estimate keeps going down! (Source: FactSet, May 28, 2013.)
And this chart doesn’t look good either:
Chart courtesy of www.StockCharts.com
The above chart shows the performance of the S&P 500 utilities stocks through an exchange-traded fund (ETF) called the Utilities Select Sector SPDR (NYSEARCA:XLU). Why is this chart important? Utilities stocks are considered safe because the companies in the sector usually have good long-term growth and consistent corporate earnings. But this chart shows how investors are fleeing the safety of utilities stocks – and I think they are running to high-risk stock sectors.
But in spite of all these factors, it wouldn’t surprise me to see the key stock indices go even a little higher because of all the buying momentum. The bear market rally, which began in 2009, has done a masterful job at convincing investors that the stock market is safe again – but it will all end in a collapse. It’s only a matter of when it will happen.
Key stock indices rising on anemic economic growth, poor corporate earnings, and leveraged investors – this is not going to end pleasantly.