Why Has the Market Declined So Little Despite the Negativity? What's Next?

In the face of the now-obvious negative outlook – the corrosive effect of deflation deleveraging, excessive debt, the softening U.S. and global economy, the “fiscal cliff”, the implausibility of a European solution, the probability of a hard landing in China and the prospect that corporate earnings estimates were far too high – the question we get most often is why the market has declined so little, and why it seems so resistant to bad news. In our view the reluctance of the market to give up much ground is typical of…. 

So say edited excerpts from an article* posted at www.comstockfunds.com

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say:

In our view the reluctance of the market to give up much ground is typical of many past market declines and reflects a state of denial by investors as they grasp at reasons to remain bullish. Currently, the reasons cited most often are that:

• the market is cheap,
• corporate earnings are strong and
• the Fed, as well as other central banks, will provide all the liquidity that’s needed to avert a serious economic downturn.

We believe that each of those evaluations is flawed.

1. The current earnings estimates for 2012 are unlikely to hold up and the market is not undervalued….

• The consensus estimate for S&P 500 operating earnings (even though we believe “reported earnings” is the more relevent) is about $104 for 2012 and $118 for 2013 but our estimate of trendline earnings is currently about $75, and, on this basis, the market is overvalued rather than undervalued.

2. Investors’ faith in the ability of central banks, including the Fed, to avert a serious downturn is ill advised.

• Global debt deleveraging and deflation will overwhelm any central bank attempts to prevent a serious downturn, particularly when we take into account that central banks have already used their best ammunition and have to rely on unconventional and untried measures with questionable chances of success.

3. In the last four major bear markets the decline started very slowly from the peak, and was interrupted by numerous rallies, but continued to gather steam, ending only after a scary waterfall decline toward the end.

• We suspect that the same pattern may happen this time around.

HAVE YOU SIGNED UP YET?

• Go here to receive Your Daily Intelligence Report with links to the latest articles posted on munKNEE.com.

• It’s FREE and includes an “easy unsubscribe feature” should you decide to do so at any time.

• Sign up. SAVE TIME searching for today’s best articles. They are all here!

• All articles are also available on TWITTER and FACEBOOK

*http://www.comstockfunds.com/ (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

Related Articles:

1. S&P 500 Prospects Not Good Given Economic Situations in Europe & Asia – Here’s Why

…[V]iewed objectively, the world currently stands at the precipice of an even greater crisis than the one in 2008-2009 but you wouldn’t know it by looking at US stock prices. The S&P 500 is down only about 10% from its peak levels in October 2007 compared to the leading indicator stock markets in Spain, Italy and China which…are all down by 60% or more since their peaks. It is folly to think that the S&P 500 index can long withstand simultaneous conflagrations in those countries because, as their economies go, so too will the entire global economy and [that is bound to adversely affect the U.S. as] close to 50% of all S&P 500 earnings are derived from outside the U.S.. Words: 840

2. Fitzpatrick: Consumer Confidence Double-Top Suggests Stocks Could Plunge

Looking at the charts we…[see] a very strong double-top formation – very similar to what we saw back in 1980….[which suggests] that we are headed all the way back down again, possibly even to the lows that we saw in 2011….This is likely to weigh on equities. Words: 291

3. Goldman Sachs’ Leading Indicators Signal Steep Market Crash Ahead

Goldman Sachs reports their Global Economic Indicators (GLI) show the world has re-entered a contraction and…is predicting a market crash worse than that of the early 90′s recession and one slightly less than the sell-off at the turn of the millennium. [Below are graphs to support their contentions.] Words: 250

4. Marc Faber: We Could Have a Crash Like in 1987 This Fall! Here’s Why

Marc Faber has stated in an interview* on Bloomberg Television that “I think the market will have difficulties to move up strongly unless we have a massive QE3 (something Faber thinks would “definitely occur” if the S&P 500 dropped another 100 to 150 points. If it bounces back to 1,400, he said, the Fed will probably wait to see how the economy develops)….. If the market makes a new high, it will be with very few stocks pushing up and the majority of stocks having already rolled over….If it moves and makes a high above 1,422, the second half of the year could witness a crash, like in 1987.” Words: 708

5. Pento: Markets Will Fall Significantly This Summer – Here’s Why

Investors are being told that the worsening sovereign debt crisis in Europe will leave the U.S. economy unscathed….[because,] since we don’t make many things to export to Europe, our GDP won’t suffer a significant decline at all…. What [has been] conveniently overlooked, [however’] is the fact that 40% of S&P 500 earnings are derived from foreign economies and the seventeen countries that make up the Eurozone have collapsed into recession. [Let me explain what effect that will have on the performance of the S&P 500 this summer.] Words: 325

6. 80%+ Chance Stocks Will Rally by End of 2012 – Here’s Why

The American Association of Individual Investors (AAII) released its latest sentiment readings yesterday…[which showed that] bullish sentiment dropped a full eight percentage points to 22.19%, the largest weekly decline since April 12….Now that virtually no one is optimistic about the stock market, that’s all the more reason we should be bullish. You see, during the current bull market, when bullish sentiment drops below 25%, stocks (almost) always rally over the next three and six months. Take a look. Words: 384