U.S. Equity Market Celebrates the New Year; Champagne Sparkles Till Time is Up

by the Curmudgeon

1. Stock Market Melt-Up Picks Up Steam in 2018:

The U.S. stock market melt-up, which really started on November 3, 2016 when the last 3% correction ended, accelerated in the first four trading days of 2018.

· The S&P 500 added +2.6% from January 2 to 5, 2018 which was it’s best first week of the year start since 2010 when the index finished higher for six consecutive trading days but only rose 1.9% over that run. Incredibly, the S&P 500 now has a Shiller P/E of 33.3 (vs 15.0 at the start of 2010 and a median of 16.15).

· The Russell 2000 small cap index was up 1.6% on the week and sports a 52 week trailing P/E of 133.96 vs nil (or incalculable) one year ago when the forward P/E forecast was 18.6 – off the actual P/E several orders of magnitude.

Jeremy Grantham of GMO wrote in a blog post:

As a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market. The data on the high price of the market is clean and factual. We can be as certain as we ever get in stock market analysis that the current price is exceptionally high. In contrast, my judgment on the melt-up is based on a mish-mash of statistical and psychological factors based on previous eras, each one very different, so that much of the information available is not easily comparable. It also leans very heavily on a few US examples.

Yet, strangely, I find the less statistical data more compelling in this bubble context than the simple fact of overpricing. Whether you will also, dear reader, remains to be seen. In any case, my task in this note is to present the evidence, both statistical and touchy-feely, as clearly as I can.

2. Trading data points that may have been missed last week:

A few quick takes on the market’s first week of trading:

1. Despite the strong start for all of the popular averages, there was not one day when Advances led Declines by 2:1 on the NYSE. Here are the actual stats:

NYSE Composite Daily Breadth

Daily Jan.1 Jan.2 Jan.3 Jan.4 Jan.5

Issues Traded... 3,083 3,061 3,072 3,077

Advances ... 1,852 1,757 1,755 1,794

Declines ... 1,163 1,211 1,208 1,171

Unchanged ... 68 93 109 112

NYSE American Composite

Daily Jan.1 Jan.2 Jan.3 Jan.4 Jan.5

Issues Traded... 340 336 342 337

Advances ... 209 190 179 170

Declines ... 114 122 138 146

Unchanged ... 17 24 25 21

2. Astonishingly, almost 50% NYSE volume occurs in last 1/2 hour of trading on Thursday and Friday vs >50% of volume in last ½ hour one week ago. Check out these stats:

NYSE Stocks (9:30 a.m. to 4:00 p.m. ET)

	Latest Close	Previous Close	Week Ago
9:30 to 10:00	104,580,532	126,648,774	75,435,887
10:00 to 10:30	48,180,983	53,884,712	32,529,209
10:30 to 11:00	40,742,125	44,250,554	26,674,803
11:00 to 11:30	34,601,305	41,310,673	24,597,911
11:30 to 12:00	31,690,179	32,277,629	21,605,578
12:00 to 12:30	25,307,075	27,691,270	19,969,981
12:30 to 1:00	25,362,259	28,007,527	17,079,515
1:00 to 1:30	22,608,153	26,116,750	17,412,260
1:30 to 2:00	21,568,630	28,890,859	19,235,682
2:00 to 2:30	24,838,238	27,974,528	19,640,945
2:30 to 3:00	28,485,325	32,892,701	19,414,861
3:00 to 3:30	34,292,166	40,642,750	27,759,183
3:30 to 4:00	327,321,657	383,388,580	386,792,672
Total	769,578,627	893,977,307	708,148,487
Composite	3,198,024,887	3,640,617,729	2,409,790,952

Victor’s Comment: More evidence to show marking up of stock prices, i.e. manipulation!

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Also, NYSE advancing volume never reached twice Declining volume:

Adv. volume* 467,660,100 549,935,197 221,397,608

Decl. volume* 288,094,038 335,012,713 472,119,579

*Primary market NYSE, NYSE American or NYSE Arca only.

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3. Analogy of stock market melt-up prior to a crash vs a champagne ball when time is up:

Jerry Goodman, a.k.a. Adam Smith, wrote in The Money Game:

"We are at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know at some moment the black horsemen will come shattering through the terrace doors wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time. So, everybody keeps asking ‐‐ what time is it? But none of the clocks have hands."

Curmudgeon: tick, tock, tic, tock....when is the party over? What time is it now?

Good luck and till next time...

The Curmudgeon
ajwdct@gmail.com

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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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