Is the bull market in its final stage?
It's not news to anyone that the economic recovery from the 2008 financial crisis has been a bit of a bummer.
The number of full-time jobs remains well off its peak, down by more than 4.2 million jobs as an army of long-term unemployed still awaits mobilization. Five years in, all the major central banks are maintaining an ultra-easy monetary policy stance. Five years in, consumers are still feeling nervous. Five years in, despite all the stimulus, the economy has managed only a feeble, half-hearted recovery -- a far cry from the full-throated rebounds seen throughout the post-World War II era.
The financial markets have played the hare to the economy's tortoise. Stocks are enjoying one of their most vigorous bull markets on record, with the Russell 2000 small cap index up more than 250 percent from its March 2009 low. It's been smooth sailing over the past year, with no significant selloffs since November 2012.
But evidence is building that Wall Street insiders are preparing for trouble and cashing out as fast as possible. Perhaps, we could even be witnessing the final top of the five-year-old bull market as investors can no longer deny the negative catalysts surrounding them.
It's worth remembering that the unbroken uptrend we've enjoyed since late 2012 has enabled by the fact that while so much could've gone wrong -- from conflicts in Syria and Iran to a resurgence of the eurozone debt crisis or a market freak out over the start of the Federal Reserve's tapering of its "QE3" bond buying stimulus -- nothing bad has actually happened.
It's been the same story in 2014 so far, with the market ignoring credit defaults in China, the Crimean crisis, currency market volatility, and a meaningful deterioration in the economic data out of China, Japan, Europe, and the United States.
Like all things, the string of good luck will eventually end. Nonsense you say? Well, insiders are already running for the exits.
Consider that despite the push to new highs for most of the stock market in early March, fewer and fewer stocks have participated. The percentage of S&P 500 stocks in uptrends hit nearly 76 percent, well off peaks near 84 percent set at the end of 2013.
Translation: Buyers are finding fewer and fewer bargains at these prices.
Or consider what's happening at the sector level: Only three remain in uptrends based on a percentage price oscillator analysis. One, transports, is the only pro-cyclical sector left with any strength. And the other two, consumer staples and utilities, are classic safe haven plays that do well when investors are worried about the future.
Corporate insiders and the Wall Street banks are bailing out too, dumping money-losing IPOs unto the market as fast as they can in what is classic late bull market behavior. According to the folks at SentimenTrader, 74 percent of announced IPOs have no earnings. That's the second-highest ratio in history. One of the main drivers of this has been the activity in the super speculative biotechnology sector, accounting for 13 percent of all money-losing IPOs. That's the second-highest ratio in 20 years. Over the past year, 20 money-losing biotech IPOs have been announced, returning to a high not seen since the summer of 2000.
Moreover, much of IPO activity has been driven by private equity and venture capital firms in what, in retrospect, could be a classic example of the "smart money" selling to the "dumb money" at the top.
Maybe I'm wrong. Maybe this bull market still has much higher highs to set before it's finished. But the skeptic within me can't shake the feeling that this has been a Goldilocks rally, predicated on a perfect combination of geopolitical and macroeconomic stability along with the most aggressive monetary policy stance in history.
With the Federal Reserve committed to ending its bond purchases, with Russia and the Ukraine staring each other down across their shared border, with the Chinese trying to control a credit bubble, and with the Japanese watching their last-gasp experiment with currency devaluation failing, I have a nagging feeling that the bears are about to discover Goldilocks slumbering sweetly -- and aren't going to be happy when they find her.
I continue to recommend clients maintain a defensive posture, with exposure to assets including U.S. Treasury bonds via funds including the Direxion 3x Treasury Bond Bull (TMF), which I've added to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended TMF to his clients.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
