The stock market has entered a world of its own.
The S&P 500 pushed deeper into record territory on Thursday, ignoring factors like a -2% annualized contraction in the economy in the first quarter (after removing the impact of Obamacare) which was the worst economic performance in three years and an escalation of the bloodshed in Eastern Ukraine. There are even reports that Russia is halting the withdrawal of its troops from the Ukrainian border.
Other factors don’t matter, either — suggesting both incredible strength and conviction on the part of equity investors or epic levels of complacency.
Those other factors being ignored include the fact that the Treasury bond market keeps warning of trouble with long-term yields under pressure.
Or that, if you look at the stocks that are powering higher, there is evidence of a short squeeze underway as the most shorted stocks have led the way for six days in a row.
Or that the CBOE Volatility Index (VIX) or “fear gauge” has been basing near 11.5.
Or that the yen carry trade isn’t playing along.
Or that commodities aren’t playing along.
Or breadth, with just 10% of the S&P 500′s component stocks also pushing to new 52-week highs.
It’s an incredible situation. In fact, stocks have come so far so fast over the last week — amid the headwinds — that the S&P 500 is only 30 points shy of Goldman Sachs’ June 2015 target. It has risen 60 points just during the past three weeks. That, in turn, has been powered by the best run in the most shorted stocks in the market — stocks like biotechnology and momentum tech that were hit so hard back in March and April — in nearly four months.
Click to Enlarge So then the question becomes: Will stocks continue to ignore all the warning signs, and keep powering higher? If so, it would be a historic extension of already severe divergences within the market of magnitude not seen, in many cases, since the bull market tops in 2007 and 2000.
Just look at sentiment. Citigroup’s Panic/Euphoria Model — which they’ve dubbed the “Other PE” in reference to the well known price-to-earnings valuation ratio — has returned to peaks associated with poor market performance going forward.
We’ve already eclipsed the level of euphoria seen in 2007. Next stop, if stocks are indeed on a one-way train without brakes, would be a repeat of the dot-com mania.
It could happen.
But I think much of the evidence — the divergences, the weak market internals, sentiment, the drop in yields — looks very similar to the run up to the August 2011 market wipeout.
If you want to learn more about the current situation, check out the video below.