Don’t Trust New Highs From Nasdaq, Record Highs From S&P 500

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Not only have the S&P 500 as well as the Dow Jones Industrial Average made their way to record-high territory today, they’ve done so with a vengeance.

Don't Trust New Highs From Nasdaq, Record Highs From S&P 500

And, while the Nasdaq Composite has yet to tiptoe into new-high ground, it’s no less impressive.

Our preferred proxy for the Nasdaq, the PowerShares QQQ Trust (NASDAQ:QQQ), is up the same 0.79% the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is today, as of the latest look, and has cleared a key technical hurdle of its own.

There’s not a lot for the bulls not to like about Tuesday.

And yet, that sage wisdom “if it’s too good to be true then it probably isn’t” hasn’t been quelled in more than a few investors’ minds. Should these doubters trust their instincts and heed the risks? Or, should they just jump on board the bullish train and assume it will never stop… like most everyone else has?

S&P 500, Nasdaq Punch Through Ceilings

The Nasdaq Composite isn’t just up for the week so far. It cleared a big-time technical ceiling, and as such has freed itself up to move on to higher highs.

The chart of QQQ (which tracks the Nasdaq 100, and makes up the lion’s share of the Nasdaq Composite) tells the story. A resistance level around $110.70 that had capped a rally effort a couple of different times earlier this year was unable to do it a third time, letting QQQ past it to its current price of $111.68.

Nasdaq 100 ETF (QQQ)What’s most encouraging about this chart is the fact that even with the strong move, the QQQ, along with the Nasdaq Composite, have some room to run before bumping into prior highs. They’ve also got plenty of momentum.

The S&P 500, as represented by SPY, is even more impressive, though also more concerning.

S&P 500 ETF (SPY)

Yes, the May-2015 peak of $213.78 has been hurdled; the bulls didn’t even seem to look back as they were breezing past that ceiling. The S&P 500 is up a jaw-dropping 6% in less than three weeks though, and prior to the Brexit vote was struggling to justify a value of 2,100.

Now with the adverse impact of the Brexit being all but unavoidable, traders have been largely dismissive of any valuation concerns.

It’s not something we haven’t seen before. In most prior instances of overheated markets, however, investors have at least been able to point to one or two palpable reasons they felt stocks would be worth more six to 12 months in the future. Right now, those rationales are flimsy at best, while reasons for a pullback hold more than their fair share of water.

3 Reasons Not to Expect Higher Highs Much Longer

Not that the Nasdaq and the S&P 500 can’t coast a little longer on the momentum that started to develop three weeks ago, but there’s not a lot of upside left to tap. Indeed, there’s good reason to expect weakness ahead.

First, the S&P 500’s trailing price-to-earnings ratio now stands at 21.4 and a forward-looking one of 17.15. Both are well above the norm, and while the bulls may argue that the forward-looking earnings outlook underestimates future earnings, history says quite the opposite — analysts are usually overly optimistic and end up paring back those outlooks the closer their delivery dates get.

Second, the S&P 500 is already ahead of the average pace for its calendar year. It’s up 6.3% since the end of 2015, but is usually up only 4.5% at this point. Granted, in a bullish year it can and will do better. This hasn’t been an especially bullish year though, and it’s not like there are a lot of catalysts out there that will cause the heat to be turned up.

Average Year for S&P 500

Finally, regardless of where the S&P 500 (or the Nasdaq) is versus the norm, August is usually a dead month, while September is usually a loser. On average, the S&P 500 ends August where it started, and generally loses about a third of a percent in September.

Bottom Line

But rules were meant to be broken and norms were meant to be overridden? Sure, anything’s possible. It’s possible this could be a case of the euphoria witnessed in 1999, when valuations didn’t matter — it was all about the story and the future. Funny thing about that year though…. valuations didn’t matter right up until the point they did. And once they did, they mattered with extreme prejudice.

That’s not to say this is 1999 all over again. It is to say, however, that investors are capable of doing some pretty wild stuff. Sooner or later, stocks find their appropriate value.

Hopefully the Nasdaq and the S&P 500 find their right (read “reasonable”) prices before luring too many more traders into this sucker’s rally only to push them off a cliff.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/07/dont-trust-new-highs-nasdaq-record-highs-sp-500/.

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