Stocks closed out the best September since 1939 with a whimper on Thursday as an initial burst into positive territory in the opening minutes of trading was quickly reserved. While the magnitude of the losses were insignificant, especially in light of the epic 8.8% gain on the month for the S&P 500, the day’s trading told us something important.
And that’s that higher prices are starting to bring out the sellers.
Combined with an ongoing narrowing of market breadth, this suggests that lower prices are ahead in the weeks to come.
Just take the 30 stocks in the Dow Jones Industrial Average. Since September 21 there has been a remarkable increase in the amount of selling pressure being forced on the market: Out of the eight trading sessions since then, six have featured double-digit declines in points lost while there has been only two sessions of double digit point gains.
Translation: The supply of stocks is beginning to increase while demand diminishes. And that’s a classic recipe for lower prices.
Another way to look at the same information is to take the four-day moving average of the net points gained by the Dow 30 stocks. This provides a nice read of the relative balance between buying power and selling pressure. After Thursday’s decline, the average has moved into negative territory for the first time since August 31 — which marked the kickoff of the historic September rally.
Considering the importance Wall Street professionals will place on the current levels of resistance, and the fact that the bears are licking their wounds and rearing for a fight, suggests that stocks won’t be able to push to new highs. Not with fewer stocks participating. Not with risk aversions returning. And not with supply beginning to outweigh demand.
However, long-term indicators suggest higher prices are ahead. Look no further than my MSN Money column this week (“Get ready for an epic bull market”) for the reasons why. Be sure to check out my segment on CNBC’s Kudlow Report from earlier today where I discussed the column’s central message: The bond bubble will fuel a round of corporate structure arbitrage as CEOs use cheap financing to purchase shares providing free cash flow yields that haven’t been seen in 50 years.
Based on where bond yields and the equity risk premium lies, I’m looking for the S&P 500 to approach 2,000 next year — which would be worth a gain of more than 70% from current levels. But first, we’ve got to get this pullback out of the way.
Be sure to check out Anthony’s new investment advisory service, the Edge. He can be contacted at
anthony.mirhaydari@live.com. Feel free to comment below.
Top 5 Stocks for the 4th Quarter Surge. Louis Navellier details five stocks set to deliver record earnings this October and jump 30%-50% in the next 90 days as the big money piles in. Get their names online here, including Louis’ buy-below and target prices.
