Five years from US stock market's low, it's joy vs worry

Mar 09 2014, 00:05 IST
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The stock market has seen higher price-to-earnings ratios - notably during the technology bubble and the end of the 2007-2008 run. Reuters The stock market has seen higher price-to-earnings ratios - notably during the technology bubble and the end of the 2007-2008 run. Reuters
SummaryFive years ago, the United States was in the midst of its worst recession in seven decades.

removing support for lower rates that many say have pushed investors into riskier assets like stocks.

Slow job and economic growth since the 2007-2009 recession has left investors worried about whether the economy and market can stand on their own without the stimulus. And rising rates would have a detrimental effect on borrowing costs, which have been at record lows for companies.

* Margin debt: The value of U.S. equities investors bought with borrowed money has been rising since June. Margin debt accounts totaled a record $487.6 billion in January, data from the Financial Industry Regulatory Authority showed. It shows hedge funds and other investors are taking on more risk and using borrowed money to enhance their returns. Borrowing on margin at this level is seen as a sign of overly bullish sentiment.

"To me, this is a very overcharged environment," said Brad Lamensdorf, co-manager of the actively managed short only Ranger Equity Bear ETF. "It adds up to a very poor risk-reward ratio for the marketplace."

* Insider selling: Lamensdorf said high levels of insider selling support the idea that the market is overvalued, as those with more knowledge believe it is time to pull back on their own stocks. He said there are 10 insiders selling the company's stock to one insider buying.

That may be somewhat inconclusive, though. Current data shows the selling bias among insiders is strong, though not at historic levels in terms of volume, said Ben Silverman, director of research at InsiderScore.com, which does not release data for proprietary reasons. He did say the first quarter is when many companies award their restricted stock as part of compensation, which tends to lead to a lot of selling.

* Where's the correction?: The S&P 500 hasn't seen a 10 percent decline for nearly two-and-a-half years, with the last one coming between June and October of 2011, a period that included a budget face-off that resulted in the first-ever downgrade of the credit rating of the United States.

Stocks fell more than 20 percent in that time period, but since then, there hasn't been a 10 percent drop on a closing-level basis. (There was a narrow miss in May 2012.) Corrections are generally considered positive because they force investors to defend their bullish positions, and without them, concern about complacency rises.

* Sentiment: Bianco Research notes that the weekly Investor Intelligence surveys show just 15 percent of newsletter writers are bearish, below the

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