Sellers Regain Market Control

Doubt is starting to permeate the stock markets. Kicked-started by Fed announcements Wednesday and yesterday morning, the S&P is down 2.3% over the last two days, and opened down 0.3% today — partly thanks to this:

Orders for durable goods fell 2.4% in August, way worse than the Street anticipated and the biggest decline since January. And we hasten to add that nasty decline includes half of the “cash for clunkers” program — regardless of your opinion, not exactly an organic source of durable goods sales. Auto orders were only able to increase 0.4%… says a lot about the near-term viability of the U.S. auto industry.

“We are in one of the most overbought markets in history,” opines Dan Amoss. “The bulls are coming up with ever more ridiculous reasons why this rally will continue in uninterrupted fashion. Most of these reasons relate to the ‘greater fool’ theory — rather than fundamental analysis and a professional, sober assessment of the economy’s health. Corporate profit margins will remain weak for years, so the stock market is much more expensive than you’d expect, given its discount from the 2007 peak.

“The casino that is AIG stock is a case in point — it’s up 250% since August. Desperate money managers are trading a stock that is bankrupt several times over, in the hopes that a bigger moron will buy it from him at a premium.

“Many who are buying or day trading these stocks at today’s valuations are speculating, not investing. They are, by definition, weak hands that will hit the sell button at the first sign of a turn in the market. The question then becomes who will be there to buy? How much lower will those bids be?

“Valuations are stretched by any measure, and this is not 2003, when the market rallied strongly ahead of much tangible evidence that profits had recovered.”