Michael Lombardi: Is it just me, or have investors completely abandoned the concept of risk and reward?
The reality of the situation is that the key stock indices are treading in shark-infested waters and the risks are piling up daily. I see bearish signals all over, but the theme among investors, even conservative investors, continues to be “keep buying.”
Margin debt—that’s the amount of money borrowed to purchase stocks—on the New York StockExchange (NYSE) reached its all-time high in April. Margin debt on the NYSE registered at $384.3 billion as the key stock indices hit new record-highs. (Source: New York Stock Exchange web site, last accessed May 29, 2013.) The highest margin debt ever reached prior to this was in July of 2007, when it stood just above $381.0 billion. At that time, just like today, the key stock indices were near their peaks and “buy now before it’s too late” was the prominent theme of the day
Looking ahead, corporate earnings, which ultimately drive the direction of the key stock indices, don’t look so good. So far, 106 companies in key stock indices like the S&P 500 have provided their corporate earnings outlooks for the second quarter, and more than 80% of them have issued earnings outlooks that are negative! Corporate earnings growth for the second quarter is now projected to be only 1.4%—and the estimate keeps going down! (Source: FactSet, May 28, 2013.)
And this chart doesn’t look good either:
The above chart shows the performance of the S&P 500 utilities stocks through an exchange-traded fund (ETF) called the Utilities Select Sector SPDR (NYSEARCA:XLU). Why is this chart important?
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