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Surging Stocks Don't Pass the Sniff Test Markets' Rise Belies Signs of Froth

http://online.wsj.com/news/articles/SB10001424052702303332904579224412693834586

By
Spencer Jakab
connect

Nov. 28, 2013 4:35 p.m. ET
Sometimes a stock-market rally just doesn't smell right.

Bad breadth can indicate a weak foundation underpinning record index levels. For example, the last gasps of the technology bubble that peaked in March 2000 came from a handful of big companies.

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The New York Stock Exchange on Monday Reuters

Today, gains are incredibly evenly spread. That counters worries about similar exuberance, says Robert Palmerton, managing director at technical research firm Baseline Analytics. "We could very well be seeing a secular bull market in the making because there's such good breadth."

Going into the last month of the year, some 73% of stocks in the S&P 500-stock index are above their 50-day moving average. With the index on track for its best gain in 16 years, that rising tide has lifted most boats.

"It's been pretty hard to pick a losing stock this year," says Paul Hickey, co-founder of Bespoke Investment Group.




But there is an alternative interpretation that is less sanguine. While the current move lacks many aspects of a bubble—there is no single industry that has captured investors' imagination—the rally smacks of a rush to buy almost any stock to compensate for the Federal Reserve keeping interest rates so low. The 27% gain in the S&P 500 in 2013 has come even though revenue growth is seen at a little under 2% and earnings growth at 5% for the full year. Investors are simply willing to pay more for each dollar of earnings.

There are more-traditional signs of froth, too. The latest Investors Intelligence poll of newsletter writers puts the percentage of bears at 14.4%, the lowest since 1987. And in a sign investors are putting not only their money but also others' where their mouths are, margin debt as a share of gross domestic product is nearing historical peaks, such as in March 2000.

Even reassuring measures may not provide comfort. The number of stocks hitting 52-week highs was about four times those plumbing lows on the New York Stock Exchange over the past 10 sessions. That is usually a good sign. Yet the ratio was at about 60 times back in October 2007, when the market last peaked.

Investors drawing comfort from this rally's broad base may be downplaying other danger signs. Just holding your nose and buying isn't always wise.