I don’t know what it is lately but the Grateful Dead classic “Uncle Johns Band” has been stuck in my head. I can’t get it out. Especially the first verse when Jerry sings, “…Cause when life looks like easy street there is danger at your door.” I feel this resonates with me and my feeling about the market right now.
As all of you that follow me know, I’m a technician who relies purely on price action to make trading decisions. I try my best not to let my feelings or biases get in the way of the only thing that really matters…price. Price is as close as we get to perfect data in the market. It sums up all fundamental and emotional data in a single number. It’s beautiful.
Price action has been so strong lately. There is no arguing that, as slight declines get bought up quickly. There is undoubtedly strong demand for stocks and right now I see no real signs of that stopping. While it does not pay to fight the trend and I try to let this positive price behavior dictate my moves, this song is still stuck in my head. Perhaps it’s all the earnings beats coming through, or the VIX spending some time in the single digits, new highs almost daily, or the economy showing some occasional signs of life. Regardless, there has been a lot of positive news lately – yet sometimes I hesitate and think everything feels a little too good.
This market is not cheap. In fact, based on GAAP earnings (through last quarter), the S&P 500 would need to fall about 19% to trade at a PE of 20 and almost 40% to a PE of 15. See below:
Next, unemployment has been been trending down hard since 2010 while the market has risen. I know there are some pockets of people excluded from these numbers, but a negative correlation exists between unemployment and the market so we won’t over complicate it. Low unemployment is great, but you can see right about when that trend starts reversing (and it looks like it might be ready), it could mean trouble, or danger at your door.
Also, the price / sales ratio is nearing its all-time high and internet bubble high, the Case Schiller PE has only been higher during the peak of the internet bubble, etc., etc., etc. Fintwit is full of these charts and statistics and it has been for years while the market has not cared and continued its climb.
Life does look like Easy Street for the market now if you are focused on price and headlines. However, I think there may be danger at its door. But until the door opens it’s best to stay on Easy Street.