Does Yellen See A Bubble In Stocks?

Does anyone else find the public's obsession with identifying the next bubble amusing? Almost by definition, a bubble forms - and then ultimately bursts - when no one is looking.

To be sure, there wasn't a public outcry in early 2000 when one could purchase something like twenty of the Dow 30 stocks using the valuation of Cisco Systems (CSCO) alone. No one really cared that technology stocks, many of which had no real revenues, let alone any potential for profit, were coming public with billion-dollar valuations.

There also wasn't too terribly much concern in the mid-2000's when home prices were appreciating at a double-digit clip year after year. Nobody seemed overly worried when the ability to breathe on a glass meant you could qualify for a big mortgage on a house you couldn't afford. And next to no one sounded the alarm when scores of fishermen turned in their nets and began running hedge funds in Iceland.

Nope, the bottom line is when things are truly rolling (and the bubbles are forming), almost nobody notices.

Fighting The Last War

And yet, for the last four years, everyone everywhere has had their eyes peeled for the next big bubble, which would lead to the next big crisis. In short, "We won't get fooled again!" appears to be the battle cry of cautious investors these days.

It is especially humorous to hear so-called experts analysts talk about a bubble forming again in Real Estate. This at a time when the number of homeowners who are still upside down on their mortgages remains astounding. Talk about fighting the last war!

Are Stocks In A Bubble?

Then there are the perma-bears who continue to yammer on about stocks being in a bubble. The argument seems to be that since the S&P 500 is up more than 25 percent this year, up 32.3 percent in the last twelve months, and has gained 168 percent over the past four and one-half years, stocks must be bubbling over!

Never mind the fact that valuation measures are not even in the overvalued zone at the present time, let alone at the stratospheric levels seen in 2000 - or even the levels seen in 2007.

Never mind that the Credit Crisis bear market had crushed stocks to the tune of 56 percent. Never mind that something like half of the DJIA companies were selling at valuation levels below the cash on their books when the bear ended. So, in early 2009, one could argue that the market might have been just a wee bit "overdone" to the downside and that the levels seen on March 9, 2009 could have been artificially low.

Nope, facts don't seem to deter the uber-bears these days. Investors got smoked twice since 2000, so naturally it is going to happen again, right?

Inquiring Congressmen Want To Know

Even Janet Yellen, who will likely become the next head of the Federal Reserve, was asked on Thursday at her confirmation hearing if she thought the stock market was in a bubble.

“Stock prices have risen pretty robustly,” Ms. Yellen said Thursday. But looking at several valuation measures and according to the WSJ, she specifically cited equity-risk premiums, she said “you would not see stock prices in territory that suggest... bubble-like conditions.”

Yellen went on to say that it is important for the Fed to “attempt to detect asset bubbles.” But for now at least, she doesn't see any forming.

Senator Mike Johanns (a Republican from Nebraska) apparently is keeping his eyes peeled for the next bubble too. During the Q&A session he said to Ms. Yellen, “What am I missing here? I see asset bubbles.”

On that topic bubbles bursting and systemic risk, when asked about the idea of QE creating risks in the future, Ms. Yellen said, “At this stage, I don't see risks to financial stability” from the Fed's current monetary policies.

Oh, and then when the future Fed Chairwoman was asked if the Fed had created policies designed to specifically support the stock market, Ms. Yellen offered up a one-word answer: “No.”

However, Yellen also admitted that the FOMC is watching what happens at the corner of Broad and Wall. “We do have to take account of what's happening in the markets,” Yellen said. She then added, “We are not a prisoner of the markets” and went on to suggest that the Fed would do what's right for the economy.

So There You Have It

So... Are stocks in a bubble? In a word, no. And for those new to the game, what's happening now is called a bull market.

But investors can rest assured that their congressmen, most analysts, as well as the next Fed Chair are ALL hard at work looking for the next bubble. And for anyone long the stock market right now, this is probably a good thing, for as long as everyone is looking for one, a bubble is unlikely to develop.

Click Here For More of Dave M's "Daily State of the Markets" Commentary

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Fed Policy
      2. The Outlook for Economic Growth

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

• Near-Term Support Zone(s) for S&P 500: 1775
  
• Near-Term Resistance Zone(s): none

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

• Trend and Breadth Confirmation Indicator: Positive
  
• Price Thrust Indicator: Moderately Positive
  
• Volume Thrust Indicator: Neutral
  
• Breadth Thrust Indicator: Neutral
  
• Bull/Bear Volume Relationship: Moderately Positive
  
• Technical Health of 100 Industry Groups: Moderately Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

• Overbought/Oversold Condition: The S&P 500 is overbought from a short-term perspective and is neutral from an intermediate-term point of view.
  
• Market Sentiment: Our primary sentiment model is Negative .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: Positive

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Thought For The Day...

Regardless of the colors on the screens, make the decision to enjoy your day.

Looking for Guidance in the Markets?

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The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

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Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

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State's Market Models - Each week we quantify the "state of the market" with a series of models.

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Mission Statement

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Positions in stocks mentioned: none

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