Blowoff Move

The upthrust over the next several days will eventually lead to the final call for alcohol.  The zenith of the buzz.  The hangover is around the corner.  I expect us to make a top for the year sometime in the middle of September.  The S&P is at a new 4 and half year high.  The S&P 500 P/E ratio is above 14.  For what? Potential 5% earnings growth with profit margins at all time highs?  Unless you get a wholesale investor sentiment shift away from bonds into equities, you cannot sustain the uptrend and get multiple expansion.  In the end, it is about supply and demand. 

The only way you increase the demand is through insider/corporate purchases, or investor/ fund inflows.  The insider/corporate purchases are dying down, so we need inflows to move things higher.  It is highly doubtful that you get that inflow wave into equities that can take us to 1500 and higher.  Investors have been burned so often in equities that they are now gun shy, willing to forgo any additional marginal gains for relative safety in bonds.  This is a secular shift that is still ongoing.  That is why we topped out at 1370 last year, and we stalled out earlier this year at 1420. 

The uptrend in U.S. stocks is coming from funds that are taking money out of global equities and piling into the U.S.  The U.S. equity market is the sole hiding place for stock investors, inflating valuations and keeping this trend intact.  But the music will stop with the upcoming elections and fiscal cliff, I expect a risk off move in late September into October ahead of these potential downside catalysts.