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Excessive Optimism Among Several Red Flags for U.S. Financial Market


Washington, DC -- (ReleaseWire) -- 11/06/2013 --The latest American Association of Individual Investors survey showed the lowest amount of pessimism about the U.S. financial markets in the past 21 months, while optimism in the survey is the highest it’s been in the past 10 months. This is a red flag because historically it’s typically a sign that investors are becoming too complacent. Call me a contrarian if you like, but when “Joe (or Jane) Donut” is excited about the economy, watch out for falling equities. It feels like even the shoeshine boys are chomping at the bit to open brokerage accounts. Should we take a page of the Joe Kennedy playbook of 1929? When taxi drivers, cooks, maids and even shoeshine boys were giving stock tips, the market was too popular for its own good. Is that where we are? Maybe. How many all-time-high(s) can we have on a fundamental deficient market before the bottom falls out?

There are other suspicious factors in the markets including valuations; another red flag. The S&P 500 now trades at more than 16.5 times earnings, higher than the market average of 15.8 times earnings. A red flag going unnoticed.

Another: momentum stocks since the beginning of earnings season two weeks ago received a very strong wakeup call when they had a dramatic selloff in Netflix. We thought that would be the beginning of a correction that’s long overdue and it proved to be quite contagious short-term for all the overbought market sweetheart stocks, which led to a drop in the U.S. stock market.

Here is another red flag, while those momentum stocks were running for cover, the other one off stocks like Google, Amazon, and Microsoft were seeing dramatic gains.Hence the reason American investors are feeling confident, but that shouldn’t be enough to inspire people to keep investing in the U.S. stock market. Remember what Bernard Baruch said, “The main purpose of the stock market is to make fools of as many men as possible.” There are more red flags in this current economic climate than there are at a toreador training center! Don’t be a fool!

Ignoring all this ongoing positive onslaught of one off stocks in contrast to all other negative report earnings, are what make the apples to apples comparisons impossible. There is a Fed induced distortion of U.S. financial markets, a tug of war between the U.S. stock market and the Federal Reserve’s Quantitative Easing (QE) bubble pumping and an economic downturn. Even JP Morgan said recently that a 100% of equity market gains since January of 2009 came in weeks when the Federal Reserve purchased Treasury bonds and mortgages. During the other weeks, returns in the U.S. stock market were negative. The Fed policy of pumping liquidity into the system to artificially suppress interest rates has made its way into the stock market. Fed easing is injecting $85 billion per month or OVER ONE TRILLION DOLLARS into the US monetary system. This intervention is pushing forward stock returns that would have come in future years! You want to talk about “irrational exuberance”, well brother this is it. The Dow Jones Industrial Average and the S&P 500 are setting record highs at a rate not seen since the end of the last century. Do you remember the Y2K build-up and the resulting crash? How did that work out for you?

Not too long ago, there was a massive conviction in the media that the Fed would actually slow down its QE and that the economy’s weak recovery would morph into something more like business as usual, guided by market fundamentals and not some Fed inspired fluff. As we know, that didn’t happen.

We are suggesting that investors sit out the U.S. stock market now and save some cash to put to work once there is an opportunity to own the market at more reasonable levels. You should always keep at least some powder dry. It’s ok for investors to earn a 0% return on their money now because the downside could be around 40%. According to the American Association of Individual Investors, less than 18% of Main Street investors are bearish on the markets. That level of optimism needs to be feared. Be wary of the pizza delivery guy with the hot stock tip. The opium of the U.S. investor remains the Federal Reserve’s liquidity and the U.S. stock market just wants to stay high.

About the author: Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She can be reached at