SOS Claus Bubble in USA markets unveiled

The U.S. Stock Market Is Even More Vulnerable!

Year-to-date the S&P 500 is up 5.6 percent. It’s up 13.2 percent since late November and 26.7 percent since late August, when Fed chairman Bernanke first announced QE2. According to Bernanke himself, this huge rally is the result of his quantitative easing efforts. He is probably right, since there are very few other reasons to support a stock market rally.

Here’s why I say that …

First of all, the fundamental valuation is extremely unattractive. The PE-ratio based on 12-months trailing earnings is at 18.5 (middle panel of the chart below). And the dividend yield is down to a paltry 1.71 percent (lower panel). Both are classic valuation metrics. And both are telling me that stocks are poised to deliver dismal long-term results.

Second, sentiment indicators are telling us that bullish expectations have reached extremes. According to the Investment Company Institute, mutual fund cash levels are down to 3.5 percent. They got that low only once, in early 2010, shortly before the flash crash of May 6, which started a 20 percent correction and got Ben Bernanke to announce QE2.

Third, the stock market is extremely overbought. Momentum indicators of nearly all time frames are stretched to the point where a bigger correction has to be expected.

Fourth, longer-term interest rates have risen considerably since mid-2010. Rising interest rates and a stock market rally at the same time has historically been a rare coincidence. And when it did occur, usually it wasn’t long until stocks caved in to the pressure of rising rates. This is especially true when stock market valuations were high, markets were overbought, and irrational exuberance reigned — as is currently the case.

For the third time in a dozen years the U.S. stock market qualifies as a bubble ready to burst. And emerging markets’ relative weakness can be interpreted as a warning sign that the party may be over soon.

MyView

Well, figures or statistics seldom lie. It is the interpretations that decides the differences. The irony about the media and expert, everyone seems to have different yardsticks to evaluate the figures or statistics. There are thousand of figures and statistics to review and each one can have differing views on each statistics.

We can debate until the cows comes home, if the economy is sustainable, why QE2? why interest rates remain near to zero? why so much geopolitical issues? why an outburst of food inflation issue? why China is frantically trying to tame inflation? Why Claus is recommending to short emerging market EEV? why aggressive investors short US Market like TWM or TZA?

Well, whenever there is a ying, there is a yang. But one have forgotten, there is one more element, called yo. Ying Yang Yo. Yo is the equilibrium that can never be achieved. Yo is the government intervention of the free market that eventually will make thing worst, period.