Fed’s Stock Levitation Failing…”If the Fed can no longer suppress stock-market cycles, the next cyclical bear market is overdue to charge in with a vengeance.”

Friday, August 28, 2015
By Paul Martin

By: Adam Hamilton, Zeal Intelligence
Friday, 28 August 2015

The US stock markets just suffered an extraordinary plunge, shocking traders out of their complacency psychosis. This cast the foundational premise behind recent years’ incredible stock-market levitation into serious doubt. Traders are finally starting to question whether central banks can indeed manipulate stock markets higher indefinitely. Any wavering in this faith has very bearish implications for stock prices.

Less than two weeks ago, the US’s flagship S&P 500 stock index (SPX) was up above 2100. It finished August’s middle trading day just 1.3% below the latest record highs from late May. At the time, the Wall Street analysts were overwhelmingly bullish and saw nothing but clear sailing ahead. Predictions for the SPX ending this year above 2250 were ubiquitous, and retail investors were urged to aggressively buy stocks.

But warning signs abounded on fundamental, technical, and sentimental fronts as I’ve discussed in our newsletters extensively. The US stock markets were radically overvalued relative to historical norms in trailing-twelve-month price-to-earnings-ratio terms. As the SPX left July, its 500 elite components had a simple-average trailing P/E of 25.6x! That was nearing 28x bubble territory, far above the 14x historical average.

Stock-market technicals were incredibly overextended too. By the SPX’s peak in late May, this massive broad-market index had powered higher for 3.6 years without any correction-magnitude selloffs. In normal bull markets, these 10%+ selloffs happen about once a year on average. They are healthy and necessary to rebalance sentiment. The longer since the last major selloff, the greater the odds for the next one.

And without normal corrections to bleed away excessive greed periodically, it was really getting extreme. The VIX S&P 500 implied-volatility index has long been the definitive fear gauge. And it had spent the month between mid-July and mid-August averaging just 12.9 on close. That showed American stock traders feared nothing, they were exceptionally complacent and full of hubris. Mounting selloff risks were ignored.

The Rest…HERE

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