The Daily Dose: Signs You're in a Market Top

 | Nov 19, 2013 | 11:00 AM EST  | Comments
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Stock quotes in this article:

hd

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bby

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tsla

Where were you when the Dow popped through 16,000? Who cares about the S&P 500's epic triumph of eclipsing 1800? The storied (and kind of outdated) Dow is what captivates the minds and wallets of Main Street. As for me, I was watching the euphoria break out on Twitter for #Dow16K, and then injected this bit of real-time analysis into the round-number excitement:

Yes, believe it or not, the valuation of a stock -- and by extension, that of the overall market -- is still something that should concern you on a daily basis. Is the Dow excessively valued at these levels? It beats me. At this stage in the rip-roaring bull market, fear of missing out (FOMO) appears to be taking root. I'm seeing no re-dedication to rolling up our sleeves and engaging in any kind of old-school analysis.

Now, the Dow did finish below 16,000 Monday. That reversal came after the stubbly bearded, famed investor Carl Icahn sounded an alarm bell on -- wait for it -- stock valuations. Since I am pretty confident that you have suspended the treasured investment philosophies of yesteryear in order to bid up somebody else's amazing year-to-date performance, here are four non-scientific ways to gauge whether we are nearing, or just beyond, a market top.

  1. Love me some yield, at any risk: Companies with poor credit ratings find little trouble raising junk debt. In a market top all companies, even the fundamentally dreadful, are perceived as being a quarter away from healthier numbers and a future of making good on outlandish interest payments.
  2. Wall Street? What's that? Among the hottest sectors of 2013 -- for example, small-caps -- analyst downgrades have rained down, and the market has yawned. By a "yawn," I mean that a well-thought-out rating cut by a major brokerage analyst is met with buy orders. In a market top, nobody on the Street believes their analysts' downgrades.
  3. Look at this weird money-making stuff: Marketing teams for financial-services firms do one of the following. Either they tout year-to-date performance in terms of percentage -- which is usually tacky to do, and tends to be a sign that funds desire that deer-in-the-headlight retail cash. Or they begin to push new investment strategies, for instance "alts," short for alternative mutual funds. According to Morningstar, money in these types of funds has risen a whopping 51% in the first 10 months of 2013 to $239 billion.
  4. Bye-bye, opportunists: Activist investors are no longer arriving on the scene of financially underperforming companies -- announcements of such all but vanish from the headlines and regulatory filings. Activist investors thrive on mispriced opportunities in the marketplace, and as a market top nears, or is at a crest, these opportunities fade. The risk-reward ratio simply no longer makes sense.

By the way, here is an example of that third indicator, financial-services marketing, in action. Note the stressing of new strategies.

Around the Horn

Home Depot (HD): Since August, when the company released its July-quarter earnings, the stock has dropped and underperformed the S&P 500. Here I am on live television, in August, predicting just that. Yet, this morning, the shares are rising after this morning's solid, but not spectacular, report. This is of great intrigue to me -- because the housing-market rebound is now clearly on a slower trajectory, as reflected in homebuilder new orders particularly. Home Depot ain't cheap no more.

Best Buy (BBY): The key metric to watch here is domestic same-store sales, which are expected to turn slightly positive vs. with an easy year-ago comparison during management turmoil. Anything north of 1% would be bullish. Anything below 0.5% could result in profit-taking.

Tesla (TSLA): What is Tesla? It's a momentum stock. As I pointed out here, when a momentum stock goes south it's best to wait for improved news flow -- because, more often than not, news has driven the gains. Wait on Tesla for now.

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