Think the Market Will Reach a New High? Here’s Why We Don’t

Just look at the environment we’re in.

By Harry Dent, author of the updated bestseller, The Demographic Cliff:

Stocks are once again rallying after another “mini crash” at the start of the year. We’ve had three of these things since October 2014 without much to show for it. Stocks have basically gone nowhere for a year and a half.

After the first crash in late 2014, stocks were able to eke out a new high into May of last year. But since then, stocks have failed to make new highs despite strong attempts like this one. Ten months without a new high.

That’s only happened at 11 other points in history. And in eight of those instances, we saw a new bear market follow. That’s almost 75%! Even after the 20% correction in 2011, the only major correction in this bubble since March of 2009, stocks hit new highs within 10 months. We’re moving into dangerous territory here.

Two weeks ago I referred to this as a “rounded top pattern,” and we’re testing that trend line which should peak in the 2,070-2,095 area on the S&P 500. If it breaks that level, then a new high would be imminent.

But here’s why I think that’s unlikely…

Coming into the May top and more-so since, small cap stocks have clearly underperformed large caps. That is the classic sign of a major top!

The dumb money continues to pour in, buying well-known large caps… while the smart money exits after having focused on buying the broader universe of small caps where there is much more opportunity. Your typical investor doesn’t have the sophistication to play that market.

But while they may be able to find some good opportunities in this are – the small caps as a whole have already entered bear market territory, and have no chance of hitting new highs! And that drags on the broader market.

Earlier this year I pointed out the equally weighted Value Line index, which showed the typical stock had already turned bearish. While the S&P 500 was down 15%, this “typical stock” was down 23%, and the small caps were down 27%.

If you’ve got some stocks still flying high while a large group of them are sucking wind, then it’s only a matter of time before the market becomes stretched too thin and rips apart.

At worst, you’ve got the biotech sector that’s been down 40% recently, after bubbling up 600% since early 2009. No chance of new highs there either! Not a good sign to see the leading sector tank.

Even if the large caps did hit slight new highs, it would only worsen this divergence between large caps and small caps. That would signal even more conclusively that a major long-term top is in.

Just look at the environment we’re in. Most other major international markets already hit bear market levels in February.

  • China’s Shanghai Composite down 50% at its worst, now down 42%
  • The DAX in Germany down 30% at is worst, and still down 21%.
  • The FTSE in Britain down 23% at its worst, now down 14%.
  • The Japan Nikkei down 29% at its worst, still down 23%

And don’t even ask about Greece and Italy!

The last potential holdouts are the large-cap indices in the U.S., otherwise known as “the best house in a bad neighborhood.” The S&P 500 has gotten to within 3% of its all-time high. But there should be strong resistance at the 2,095 level just above here.

Here’s my favorite chart to show why this is not the time to buy stocks, but sell them. This shows the expected returns over the next 10 years based on stock valuations as a percentage of GDP today. As the correlation shows, this has been very accurate in the past:

Market Valuation Versus S&P 500 10 Year Return

It says that you should expect to lose 1.5% a year for the next 10 years, which means you would lose near 20% over the next decade. I, of course, expect worse as we are in the once-in-a-lifetime winter season where stock crashes are the most devastating.

In the update to The Demographic Cliff in paperback, I favored a peak in May 2015, but allowed for a substantial correction, followed by one slight new high in 2016. After that, I expect the next great crash towards 5,500 by late 2017.

I still favor the high already being in. But either way, the upside gains are limited to 5% or so in the next few weeks or months, and the downside is 70%-plus in the next two years!

It’s better to get out a bit early than too late as bubbles burst at least twice as fast as they build… just ask the Chinese. By Harry Dent, author of the updated bestseller,The Demographic Cliff. Find out how to get it here.

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  33 comments for “Think the Market Will Reach a New High? Here’s Why We Don’t

  1. GatoHead says:

    I don’t disagree with much of his premises; however, Harry’s been predicting the end of the world as we know it for about a decade.

    I’m very bearish myself – especially at these unjustifiable levels – but Harry makes me look like a Pollyanna.

    • ChrisM says:

      Reading his book now. In the book, he doesn’t predict a downturn until 2015. So I don’t see the past decade predictions. But his charts are very interesting to review relating to demographics and their impact on spending and the markets. The place to be will be Mexico and India, not the US, until 2023. H

    • Chris says:

      Agreed. Harry takes the data and makes worse case predictions. That being said, the US economy in particular and the global economy in general is sick and getting sicker. I’m not sure there be another’08 crash but we are staring down the barrel of a long Japan style economic malaise with no end in sight.

  2. Nick says:

    “The dumb money continues to pour in, buying well-known large caps…”

    While I agree the markets are mispriced by any rational measure, there does not appear to be anywhere else for the money to ‘go’. Hence sky high stocks and real-estate.

    With neg rates on the horizon, I don’t see investors piling into cash.

    I can say, the earth is ending! And I would be right, only it will take a few billion more years.

    It’s more than likely at some point you’ll see the swift collapse of everything or possibly a spiteful war started to distract everyone from the real causes of economic collapse.

    I am watching in horror as decades old businesses all around me are closing and ‘for rent signs’ in commercial spaces bloom. People are fleeing my area as the decay of real business is palpable. No doubt home-owners are tapping into newly flush home equity lines to keep the Starbucks economy going.

    This can go on for some time. This should be called ‘The Nothing Matters’ economy.

  3. Nope says:

    I fully expect the markets to break all time highs. It’s not that far away. We’re only a 3% increase away from all time highs. Charts are great as helping us see patterns in the past but when manipulation is present, charts are almost worthless. This year will be a highly positive year for the markets. Next year, who knows? Maybe a crash will take place but until then, things are going up from here.

    • Petunia says:

      Election years are always good years for the market. Watch out for Janurary 2017.

  4. volanko says:

    really falls back to several basic tenants, where else you put your money to work, the stock market and economy are two completely different things, and wherever the momentum driven algo’s decide to chase it, the market will move on their decisions.

  5. Dave says:

    No crash for now. Crashes are very rare. I dare anyone to prove me wrong! Someone please define the smart money. If its the hedge funds I dont think so. They have been losing money and some have been closing.

    The best trader is J Yellen. She knows how to push up the market and knows when its going up ahead of time. She has a team of central bankers to work with. They have bazookas and helicopters and do whatever it takes.

    I guess I answered my own question. J Yellen and her team gave the smart money. Prove me wrong if you can!

    • Petunia says:

      The fed is the smart money now. Don’t fight the fed has never been truer.

  6. Yoshua says:

    “Market Value of Corporations as % of GDP”

    Is there a Golden Rule that the value of corporations should be on average 60 percent of GDP ?

    Should the Multinationals be valued according to U.S GDP ?

  7. Bruce Adlam says:

    Yes the Feds ,CBs and governments can manipulate all they like like in a game of chess until it’s checkmate. Game over you start again history has a habit of repeating itself

  8. Dave Mac says:

    Going all cash is fine, but short-selling against the FED is utter folly.

  9. Bruce Adlam says:

    If short sell didn’t have an expirey time you would win because powers of the fed is not unlimited

  10. Bead Blonde says:

    As Janet Yellen testified, there’s plenty more macroprudential ammo at the Fed. You can’t help but be impressed by their unblemished record keeping the balloon in the air. The “smart money” is that which awaits the next Fed tap and then plunges into the market feet first. Don’t fret about revenue or sales. Don’t fret about seeming contradictions in government statistics. Just believe and breathe in, breathe out.

  11. Jz says:

    Fisrt, predictions are not useful since everything is random and can go either ways. What’s useful is reward when prediction is true and loss estimate when prediction is false. At this moment, if S&P makes new high, gain is limited within 5to 1%. If it drops, it can be 20 to 50%.

    Second, fed printing can only push asset up given market participant wants to take risk. In 2008/09there are time fed keeps easing but market still drops because people are scared and do not want to take risk. If you print money, I will hold money because any other assets else are scary. It has been 7 years since market participant considered risk is low and that’s why fed printing works. I think it is not true that fed print can push assets up under volatile/scary environment which has a probability to happen due to high prices of everything.

    Third, please remember when fed wants to do something, they do it consistently over long time. Bernanke said rates low until 2015 back in 2009, and fed kept it low with out changing directions. Reason is simple, they know consequences due to money policy change takes a long time to play out, if they flip/flop in short time frames smaller than 5 years, they can not expect what kind of consequences will happen at when time. Now they say they want to raise rates, and I expect them to do it for the next 5 years at least. They may pause, and say what ever they need to manage people’s fear, but raise will be either flat or up. I am not expecting negative rates in US for the next 5 years.

  12. Ptb says:

    Harry Dent is quite often wrong. Capital flows ar going towards the equites markets because there’s some return available.

    • Wolf Richter says:

      Until there isn’t!

    • Mark says:

      Harry Dent is very often wrong, just now his using “next couple years” time frame. People who listened to him lost everything in last 10 years.
      Learn about subject and use your own head instead, it will pay off on long run.

    • Cameron888 says:

      Capital flows go THROUGH equity markets Ptb not into them.

      For virtually every buyer of $1 million or whatever of stock there is a seller that takes his 1 million or whatever out of that stock.

      Stocks go up when buyers are keener than sellers.

      Harry Dent is a forecaster and he does not pretend to be correct 100% of the time and he is not. But he has made some pretty big calls in the past including predicting a substantial fall in US real estate last decade years before anyone else. You only need refer to his much older publications. Most people never believed it until it happened. Nothing new there when it comes to human behaviour.

      The mainstream financial media are all part of the sell (to you) side of the industry (ie. buy at any price and do not sell) so don’t expect any of them to agree with Harry Dent or any others,( like John Hussman – Hussman Funds), who have been sounding cogently argued warnings for many months now.

      If you believe he is wrong on this prediction (which others share – so he is no lone voice) then by all means load up on stock at these prices and good luck if you are not a very active trader with tight monitoring and good risk management.

      Of course the Fed still has some ammunition left to goose the market once more (and probably will) but clearly the market is extremely touchy as was amply demonstrated earlier this year and prior to that.

  13. randombypasser says:

    Not sure about actual crash, seems more likely we will have slow bleeding like it was back in 2000-2003. The top formation of 1999-2000 also resembles pretty much of Harrys “rounded top pattern” if it matters for anyone.

  14. TheDona says:

    Growth is over. It is just flat period. And will remain so for at least a decade. Too much consumer debt – shrinking wages – too many venues to buy from cannibalizing each sector. I think we will get a nice up tick here and there to keep everyone focused on the illusionary positive and then a few down ticks…nothing scare worthy, but enough to keep it flat to slightly negative over the long haul. It’s a psychological ploy to keep the Sheeple from panicking.

    McDonalds is planning to open 1,250 outlets in China because the new British CEO still thinks it is a growth area. I imagine the Chinese will be eating more noodles and rice from local vendors than eating McDonalds as the Chinese economy continues to de-rail. But McDonalds, like a junkie, just has to look for the next high (growth in this instance).

    I’m sure all of you readers have seen Walmart’s latest…first decline in sales in 45 years. Which means less stuff needed from China…which means China will be making less stuff…which means lower wages or layoffs in China…which means they wont be buying McDonalds.

    • Dan Romig says:

      Very well stated!

      Mickey D’s stock has, so far at least, done well. I do not own or eat there, but there’s one nearby (south MPLS) that does well. All day breakfast is a huge hit in Fargo, eh?

      • TheDona says:

        HI Dan. Love hearing the Fargo accent. :-)

        McD had a few rocky years (at least in the US) before they started the all day breakfast. Which lends one to believe that people are not too keen on their burgers. The folks located in the food desert areas (poor and rural) were looking for cheap, not good. In the more competitive areas/locations, the burger sector is packed with superior players.

        Maybe they should expand and excel in the all day fast food breakfast here in the US and phase out the burger (or whatever that anathema is). They could also take a chunk of Starbucks business if they made a true play for it.

        You are welcome Steve Easterbrook!

    • ERG says:

      The ultimate reason for the flatness is demographic – though idiotic, bandit government and ass-backwards economic policies have not helped.

      Once the age demographic bulge enters the range where more seniors are buying diapers than new parents, it’s GAME OVER for growth. Japan is already there; soon to be followed by China, Europe, and the US.

      A Ponzi scheme works just fine – until you run out of new comers or all your customers want their money at the same time.

      Socialism works just fine – until you run out of other people’s money.

      NOTHING works when you run out of people.

  15. walter map says:

    I assume you have a perfectly good mattress. I seriously suggest you use it.

  16. Bead says:

    March was a banner month for SUV sales! Confident consumers, and the car lots must have hired 25,000 new salespersons. So the economy continues to surge. Housing prices are going to the moon where I live, multiple bids, can’t get agreement if you insist on inspection. Pretty soon everybody will be making better wages with the $15 minimum. True, you probably are better off collecting rents than paying, but once Hillary is confirmed the 1% will be granted another four years of collecting. The younger folk were never granted an education, so there are no political consequences for their predicament. Just collect what is possible and if there’s an air pocket the Fed can print its way out. Extend the student debt to 100 years. Lots of solutions; Dent just lacks imagination.

  17. Bobby says:

    The “Sell in May and go away” is setting up nicely! probably could be re-worded to Sell in April..etc..etc..

  18. Yancey Ward says:

    I still expect, at some point before November, that Yellen will unleash QE V. I expect it to happen in July or early August. I don’t know what the claimed initiating even will be, but some excuse will be offered that is total bullshit. I then expect you will then see the final blow-off top in this market where the Dow exceeds 20K, and the S&P exceeds 2500 sometime in October.

  19. hidflect says:

    We’re in the ephemeral emotional stage full of Sturn und Drang. What’s the P/E ratios? What’s the debt levels? We can work this out. But one thing; there’s no new money coming in, Gentlemen. Even Tesla with their massive new car coup. They are seriously overvalued. Aghh.. fuggedabouditt. Just buy gold miners, sit back and relax.

  20. LG says:

    Amezing how people forget the last crash!
    And this time we got China, Europe and Latin America joining the “party”!

    Hedge accordingly people hedge strong!

Comments are closed.