With 1 day left before the Treasury hits the so-called debt ceiling, Congress suddenly found a way to act — I mean kick the can. To no surprise, it has done nothing to solve the broad budget/debt problem, and has not managed to kick the can very far since we’re told this will happen again in February.

The last massive short-squeeze was seen in May. 90 points were added to the S&P500 over two weeks. Then with the shorts squeezed-out, buying pressure stopped, causing all those gains to be lost in the ensuing month. It took the Fed backing away from its QE-taper threat to stop the sell-off. (there’s a healthy market for you…)

The current short squeeze has added nearly 80 points in the past week. Keep your eye on 1729 for the S&P500 since that’s where it ran out of steam in September.

The Greedometer sequences in 2000 (before the 47% drop) and 2007 (before the 47% drop) saw a final S&P500 peak within 1% of the previous peak. So the 1711-1745 range would be an appropriate place for a crash to start (1729 +/- 1%).  Today’s 1721 works. So does yesterday’s 1711. So would 1745 on Friday.

If you’re counting on earnings season sustaining the risk-on rally, don’t.  Pre-season  (sandbagging season) saw the second biggest lowering of expectations for earnings in over a decade. More importantly, so far slightly over 50% of companies reported have beat lowered (sandbagged) consensus earnings estimates. An average beat rate is around 66%.

Gentle reminders:

  • 80% of this year’s S&P500 gains have been attributed to expansion in the P/E multiple courtesy of the Fed fanning the flames, not an expansion of earnings.
  • Profit margins are mean reverting. The first two quarters of this year saw some of the highest profit margins ever. We’ll have a good view on Q3 profit margins in a couple more weeks, but judging by the poor start, it’s a safe bet profit margins are rolling over.
  • The S&P500 CAPE is in the 24s – nearly 50% above the long term mean. Mean reversion can be really inconvenient.
  • Insiders have been dumping their personal shares this year at a pace never seen before -eclipsing the 2007 pace of panic selling (at the top).
  • Margin debt is near all-time highs (money borrowed to leverage investment bets). This typically peaks at secular stock market peaks (it did in 2000 and 2007).
  • Breadth has been lousy over the past month. Fewer stocks are participating in the rally — a sign the party is ending.
  • Retail investors have been buying stock this year at a pace not seen since year 2007 and 2000.

 

Hmm.