Don’t be fooled by the latest dead-cat bounce in stocks

The S&P first passed 2060 in November, 2014. It has tried and failed to significantly advance from that forty times. The longer it (and the Nasdaq Composite and Dow) moves sideways the stronger the resistance is to a move higher. The stock market is very over priced at 23.8 times earnings (i.e., 13 times earning is closer to long-term average). But, average earnings per share dropped from $106 in 2014 to $87 today. Normally, this would have made the stock market sink. But, central banks around the world have made almost a complete fiction of market-based price discovery. The deterioration in average earnings per share not enough to convince you? How about business sales versus business inventories. Sales have been falling and inventories rising to make the ratio exceed 1.4. Previously, this level had been only seen during recessions. This bring to mind the road runner hanging in mid air after he sprinted over the cliff.

My overall graph dividing cyclicals by consumer staples fell substantially in June. Adding to this, is the severe weakness seen in the Technology Group in my relative-strength stock-sector table. Of the seven sectors in the Technology group, only the Telecom sector rose and the Pharmaceutical Sector was flat. All the others fell with the Software, Electronics and Internet Sectors the biggest losers. The Cyclicals Group is stronger but the stock market needs both of these groups working at full strength to move significantly higher.

Here’s the relative-strength graph of the Telecom Sector:
telecom

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