Back in June, when the S&P was slipping below 1600 in a
scary 7% correction, I said we would see "1800 before 1400." Here
According to the Leuthold Group in a research note published
earlier this month, "Small Caps are selling at a 16% valuation
premium relative to Large Caps, using non-normalized trailing
operating earnings. Using estimated operating earnings, Small Caps
are selling at a higher valuation premium of 23%."
Going back to 1983, they say the median premium is only 2%.
And while a 16% premium sounds rich (and historically, it is), the
differential hit over 25% in early 2012.
Is there any justification for these valuation extremes?
I think there are several:
1) This bull market may be in its late innings, but they are the
most powerful ones, capable of shattering all kinds of records,
beliefs, and underexposed investors.
2) The economy is building momentum and capable of hitting 3% GDP
next year. Especially with the Fed on its side.
3) Earnings on are on pace for new records above $110 for the
4) While headline strategists like Fink of BlackRock say the market
is fully valued, most of the PMs whose 13Fs I looked at this
weekend are still happy to hold large positions in their favorite
5) The final stage, or inning, of this bull will be something
euphoric, with crazy headlines and lots of sidelined money finally
capitulating, where favorite stocks are going up 5% in a day, after
having already gone up 50-100% for the year. That's when smarter
money will be selling.
All of these together create a virtuous spiral of momentum for
stocks. Yes, multiple expansion is and will continue to play an
important role. But that is not a criticism of strong bull markets.
It is the definition of them.
And my list leads me to a new prediction of S&P "1900 before
1500." Obviously I am allowing for a serious 10% correction at any
time, maybe next spring. And some good 'ole sideways action for a
few months, after we hit 1850, might be in order too.
But I am not allowing for a market top followed by a 20% correction
and bear market. Not yet.
Bottom line: the bull market top is not even close.
I invite you to add to my core list, or tear parts of it down if it
ISHARS-R 2000 (IWM): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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