It’s official. I am joining the “wary” camp. As the song goes, “There’s something happening here / what it is ain’t exactly clear …” Yup, I had to go back fifty years for that line from a Buffalo Springfield tune, but the sentiment expresses my new-found wariness about the market. Primarily, my wariness stems from overheating, too much too fast, and chew fifty times before swallowing. The market is going up without a major catalyst and that says to me its eyes are bigger than its stomach. It will become overly full and then …
Yup, I am stumped about how the market opened today. The DJIA opened strongly out of the gate, as did the S&P 500 and the other major indices, including the Russell 2000 (RUT). Now, all are retreating, but of the above, the RUT has reversed the most. It has erased 18 points from its morning high. That, my friends, is a huge reversal for an index living in the 1100-1200 zone. More importantly, it did it fast and it did it first. Something is happening here.
True, the kilt-wearing, bagpipers came through yesterday and defeated the ill-advised referendum to leave the United Kingdom and I imagine the market likes this, as it should. Preserving the European Union is a good thing for the market, but is it enough for the big lift this morning?
Speaking of that big lift … The S&P is now in the red, as is the NASDAQ, and the DIJA has lost most of its gains and the RUT is falling deeper into the red. The bears have finished in the woods and are now making headway on Wall St, again. Could it be the bears liked the economic data that came out this morning?
- The Conference Board reported that their Leading Economic Index rose +0.2% in August. The reading was below the consensus of +0.4% as well as last month’s reading of +1.1% which was revised higher from +0.9%.
I don’t know. Maybe I am making a mountain out of a molehill (another one, sheesh!) Perhaps the market is just returning to its norm after a few upbeat days, you remember, the boring market that lacked energy.
Maybe, and that would be fine, because the market still needs a catalyst and I can name that catalyst – earnings. If the market moves too soon, too quickly before the next round of earnings, it sets itself up for a potential fall.
Okay, so here is the root cause of my wariness this morning – the market is getting more than just a bit ahead of itself. On my trip back to the 60s this morning, I picked up some information, some historical data …
Normally, I take comparative historical data with a grain of salt (pulling out all the oldies today), but the data that came across my figurative desk today struck me as something to think about, especially since I believe the market is getting ahead of itself.
- Over the past 50 years, the norm for the median P/S ratio has been 0.88.
Interesting enough, but when you look at what it is today, you should start thinking. The median price-to-sales ratio in today’s market is 2.08. So, what I am thinking about is how relative is this number? Are today’s dollars comparable to all of the dollars over the last fifty years? For most of the 60s, 70s, and 80s, a single dollar bought a lot. Today, a single dollar is a throw-away, unless you shop at a dollar store.
For example in 1965, a gallon of milk cost 95 cents. Today it costs upward of $3.60. Simple math tells you that the inflation rate on milk alone is just about 400%. Maybe this is not a fair comparison, since we are talking about a median price over 50 years. Maybe milk would turn out to be something reasonable on a median price basis.
In any case, the tingling in my neck tells me something IS happening here and what it is ain’t exactly clear. I have to admit, I really love that song, always have.
Trade in the day; invest in your life …
