Major selloff coming?

Stock markets are seriously overbought right now.  But, the rally in shares has been bolstered by better than expected economic data and earnings reports.  I first pointed to a rally in shares in March, but I didn’t get fully onboard until April (after all, people like Louise Yamada were still pointing to downside risk).

But, by early June, the rally was looking toppy and soon, most savvy investors were saying stick with high quality over junk, despite the huge run up in risky stocks. Personally, I saw June as an important period on the data front, because if data disappointed, shares would sell off. Otherwise the bear market rally could continue, aided by short-covering.

The data in June was better than expected and shares continued to rally despite being seriously overbought.  However, the day of reckoning may be upon us.  Yves Smith has a good post “Is This the Start of the Big One?”up as to why.

What worries me is that the rally in shares has been pure multiple expansion. You have quality retail stocks like Nordstrom (JWM) trading for 20x forward earnings when there has been no discernible uptick in retail sales.  That’s crazy.  Moreover, as I said in May when consumer confidence was exploding through the roof, “Let’s remember that confidence does not translate into consumption, especially as most of the uptick here was in consumer expectations.” And, indeed, underlying consumer demand has been weak.

So, where does that leave us? Back to where we were in late May, awaiting another set of data points to confirm the initially bullish economic data of this past summer.  If the data is good, shares will rally yet again.  However, there is increasing concern that the global recovery will not be robust. See this morning’s CNN Money’s article.

With China in full bubble mode and stocks there having sold off over 5% today, we are seeing a major meltdown across Asia and Europe as worries that we have gone too far too fast take hold. Below is the pre-market data as of 8:45AM ET.


As we head into September and October, when many major market crashes have happened, expect investors’ nervousness to increase.

  1. Praedor Atrebates says

    There can be NO basis for recovery so long as the “consumer” (ie, American CITIZENS…when did we become just “consumers”?) is still over-leveraged? There can be and will be no buying of “stuff” while people are in debt, losing their jobs, seeing reduced hours and reduced pay.

    The credit-based consumer economy is dead. Good riddance.

    ANY stock market run based upon fantasies of its return are doomed to sputter and fail.

  2. aitrader says

    Super technical analyst Bob Prechter of Elliott Wave thinks this is the beginning of a wave down that will take out the March lows.

    The S&P looks like it’s finished a head-n-shoulders top, which is also a bearish technical indicator.

    Prechter also sees dollar strength and significant oil weakness ahead, both of which are evident this week.

    Then again France and Germany surprised with a positive GDP in Q2 but it leaves me wondering if we’re confusing Q2 noise against the larger trend.

    The stimulus hit in Q1 and there was bound to be an effect. The cash-for-clunkers program alone can explain the blip in car sales. With the stimulus waning (did anyone think the effect would be more than temporary…?) a reversion to trend is probably due.

    My call is for a bumpy ride to a November drop after some tidbit of bad news flips the herd into bearish behavior.

    1. Edward Harrison says

      I see bumps in the road as well and so far the numbers on retail sales and consumption confirm any recovery will be weak. We are at a turning point, so anything is possible as it depends to a large degree on consumers’ willingness to spend in the face of large debts and banks’ willingness to lend in the face of those same debts.

      However, at some point, say November as you suggest, the trend will be clear and you can make your bets with a lot more conviction.

  3. ahab says

    sell off- presposterous-

    with almost 90% bulls- got to go up-

    right? [snark]

  4. Frances says

    After listening to Bob Prechter’s latest analysis which I personally find very compelling, you realize that over the long term almost everybody is right and everybody is wrong. Maybe Bob Dylan had something there.

    Whether america ultimately goes bankrupt or just unravels from political corruption, super violence, the delusional right and media monotony seems an irrelevant distinction. Within the next 20 years only those who have found safe havens abroad will be relatively comfortable and secure in their investments.

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