Stocks have been on the rise and it appears that everything is OK. But here are some things you should consider.
Yes, stocks have been going up. They’ve had a dramatic run-up off of their bottoms. However, historically, run-ups this steep and this fast are rarely sustained. When they are, it’s in times when there’s data that proves that an economic recovery is underway.
I’m not saying that there haven’t been some improvements, but much of that has been due to the government spending that has gone on and has been propping up the markets.
The first point to take away is that the steep 60 percent gain that we’ve seen off of the S&P’s March lows are likely unsustainable. Consumers still aren’t spending. It’s mainly the government that’s propping things up at this point.
Also, the consumer can’t purchase the larger ticket items such as cars, homes, appliances, and furniture, on a large scale without the banks lending them the funds.
On Friday, I stepped into one of the largest banks in the nation, that I bank with, and basically interviewed my banker without him realizing it.
He said that currently, out of 41 loan applications that have hit his desk since Jan. 1, only one of them has been approved. Then I asked more specifically how the car loan business is doing. He said that only one out of six auto loan applications are getting approved right now.
My point here is that even if consumers wanted to spend, their hands are tied because they can’t get a hold of the money they need to make the large purchases that are necessary to keep things flowing in the U.S. economy.
Thirdly, stocks are rising but on declining volume. Historically, this has never been sustainable. That means a sizable correction is likely coming soon. September or October is statistically the most likely month for this to start happening.
A healthy stock market uptrend should have volume expanding in the direction of the uptrend. That would tell you that more buyers are coming in all the time. What you’ve had lately is a lack of sellers and yet a few buyers here and there, and that has pushed stocks higher.
However, at the first sign of weakness, investors will scramble once again to the sidelines and selling will prevail. The tipoff we will get is the lack of concerted buying seen through the volume in the Dow and S&P 500 in particular.
Lastly, and possibly most importantly, is the wave of insider selling that’s going on within corporate America right now. It’s estimated there are about 30 corporate insiders selling for every one who’s buying. Before the Lehman collapse it was around 24-to-1. So they are selling more now than they did then. What does that tell us?
Corporate insiders are placing their wagers even now on what the upcoming months to year holds for the stock market. They are betting on a fall and that prices are at a premium right now in proportion to where we are economically within the country.
These corporate insiders have huge insights into how their own businesses are doing. When insiders from all over America are selling in many vital parts of the economy, that throws up huge red flags to me.
What does that mean for currencies? Currency investors will likely reverse their risky trades as stocks have a major correction. When this happens, we’ll likely see the yen head higher and currencies like the already weak British pound head even lower in the months ahead.
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