Why A Stock Market Sell-Off Is Imminent
Because unknown factors can appear and influence events, one can never be sure of what will happen in the future. But we can say what is likely to happen and what is not likely to happen given available information. And right now, all available evidence suggests that a big sell-off is underway.
What evidence am I referring too?
Beginning with fundamental analysis, we can note that compared to a year ago, earnings are down 30% while stock prices are down only 20%. Meaning that stocks have become approximately 15% more expensive than a year ago. If stocks had been undervalued a year ago that may not have been so bad, but the fact is that stocks were more expensive than the historical average already last year, and are even more expensive now.
While most companies did do "better than expected", that only reflected that "expectations" had been discretely and conveniently lowered just before the releases.
As is noted in this column, stocks are now more expensive than the historical average, particularly relative to the actual earnings during the latest year, but also relative to the 10-year average.
Bulls would presumably respond by pointing to how interest rates are lower than normal. That is true, but on the other hand I would argue that growth prospects are more dismal than normal.
Continuing then with technical analysis, we can see that stocks are now more over-bought than at anytime before the latest 8 years.
If we continue with an analysis of the monetary situation, we can see that the rapid money supply growth that started in September 2008 after several months of stagnant money supply, again turned stagnant after March. MZM has since mid-March grown at about only 4% at an annual rate. With bank credit continuing to decline, it is difficult to see any acceleration in money supply growth. Even so, this indicator is the most bullish one, indicating stable stock prices assuming all else is equal. But as this indicator isn't everything, and the other indicator clearly indicating an imminent sell-off, the overall assessment must be that a stock market sell-off will come soon.