The major indices have staged a massive market rally during the past month with the help of a lot of strong momentum. And, while I did not expect the market to run as high as it has, my indicators continue to give bullish readings.
It’s true that there are a few bullish catalysts for the market right now. The Fed will likely maintain a forgiving stance during the upcoming election year, not to mention that there is usually seasonal strength during November, December and January. Looking back over the past 60 years, when the market performs well in October, it has led to a positive November about 80% of the time.
However, I am still skeptical that this market rally can last, and there are signs that the market is starting to get tired.
First, performing a price-to-earnings (P/E) analysis of all stocks going back 10 years has indicated to me that the market is over-priced by about 60%.
Additionally, the Buffett Valuation Indicator, which compares the Wilshire 5000 Index to the gross domestic product (GDP), is showing that the market is very over-valued. While the mean reading for the indicator stands at 72.5%, right now, it’s giving a reading of 118.5%.
The indicator has recently given a reading as high as 125%, which is even higher than where it stood between 2007 and 2008. However, it is not yet as high as the 136% reading during the tech boom of 1999-2000.
And, as I mentioned last week, we continue to see very narrow leadership, as just a handful of big-name stocks like Facebook (FB), Microsoft (MSFT), Alphabet (GOOG) and Amazon (AMZN) are propping this market up. You might have heard that Facebook’s market cap has now topped that of the colossal General Electric (GE), but trust in the old adage I like to use: When they raid the house, they take all the girls and the piano player.
Eventually, even the giants will fall, because that is what happens at the end of an economic cycle, such as we’re seeing now.
The bottom line is that, although I am currently neutral, I don’t think there’s much that could sway me to be bullish, but it would take very little to push me over into the bear camp.
While it’s difficult to project what this market will do more than a few days out, what’s clear to me is that stocks are over-valued. This is not the environment to be employing a buy-and-hold strategy, because eventually we’re going to see a major readjustment in prices. I don’t think we’ll see it tomorrow, and it may even take a few months to occur, but anybody who thinks this is a great time to buy and hold is wrong.
Still, there’s no denying the market rally right now, so let’s take a short-term call option. Remember, I don’t like to hold my single options trades longer than three weeks, so exit this trade by Nov. 27, even if it’s for breakeven or a small loss. My analysis only looks at very short-term moves, and if a stock has made the anticipated move within a three-week window, the likelihood that it will decreases significantly.
To take advantage of what I think are probably the last legs of this market rally, let’s get long Wyndham (WYN) for a short-term call option trade.
Buy the WYN Jan 87.50 Call options at $1.00 or lower.
WYN closed Thursday at $81.55. After entry, take profits if WYN hits $85.70 or the option price hits $2.40. Exit if WYN shares close below $79.40.
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