As Ryan Detrick notes, the Dow has gone more that 100 days without a 3 day losing streak, breaking the prior record of 95 days from 1927. COMPQ had 17 days in a row with higher highs for the first time since the 1999 tech frenzy. SPX has now gained an uncorrected 26% since its November low, the longest comparable streak in more than 30 years.
Wall Street has responded by raising their forward price targets (chart). Goldman raised their YE13 SPX target to 1750, YE14 to 1900 and YE15 to 2100. The firm gets there by assuming some tremendous growth (chart).
What makes this striking is that the tear in SPX has already heavily discounted future growth. A look at EDITDA shows little growth so far (chart). Similarly, Ed Yardeni points out that revenues correlate with global GDP, and neither is growing (1Q13 revenues, in fact, fell). This is a significant headwind to earnings (chart).
As a result, what we have seen in the past several months is almost entirely multiple expansion (chart). Current multiples are now well above average and, in fact, above the 2007 high (chart). Ditto for price to sales.
These are the fundamental concerns to which SentimenTrader refers. As for sentiment concerns, consider that Ned Davis' current measure is at among the most bullish extremes of the past 10 years (chart), yet SPX has not responded as it has in the past (red arrow).
So, what's going on?
First, it seems that 'smart money' (informed buyers) have been selling to 'dumb money' to a degree last seen at peaks in April and September 2012 (chart). That would not be surprising, since insiders see the same fundamental, technical and sentiment concerns as we have noted recently.
Second, hedge funds, which missed this rally, are also having to chase (article). And of course there are substantial corporate buy back programs taking place.
Third, the last leg of this rally has likely been driven by investors buying trash. Goldman notes that the SPX companies with the most debt, the least cash and the least earnings have gone up 27% in 2013, twice that of higher quality companies.
You can see the dash for trash in both net new highs (NYHL) and the bullish percent (BPSPX). In May, there have been 7 days where more than 700 net new 52-week highs have been made; in all of February, March and April there were only two such days. When the bullish percent has been this high (90%, an all-time high) in the past, SPX has always corrected at least 5% in the next month (chart).
Wednesday's sell off was telling. We counted more than 40 separate ticks below -1000, a remarkably high number, probably the highest since August 2011 and indicative of large (institutional) selling. This neatly fits the sentiment pattern.
Finally, Josh Brown wrote an excellent post this week in which he noted that market "history suggests we get an average of three 5% pullbacks each year, one 10% correction each year and a 20% sell-off every three-and-a-half years. A quick trip down to 1600 would set up a new leg higher without the current exhaustion. A resumption of the rally from here led by a thinning herd of advancers would actually be the worst thing that could happen."
In this case, 5% corresponds with a retest of the breakout from the 2000-07 resistance zone at SPX 1600. That seems possible given prior patterns in 2013 (chart). On the other hand, COMPQ opened and closed above its weekly Bollinger last week; in the past, this has sometimes preceded a ramp higher but most often been associated with a multi-month retreat much greater than 5% (chart).
Happy Memorial Day, everyone.