The US stock market hit the highest point that it is going to hit for the 2010 year – in April. A combination of federal stimulus that made for larger income tax refunds, plus cash for appliance clunkers, plus the housing tax credit —all combined to give the consumer a short term sugar rush (the April stock market peak). Those of you with children know what happens after a sugar rush: a sugar crash.. (let’s not use the word crash).  

 The slide from the April peak has not been a gentle one. It has resembled a roller coaster with this important distinction: each major high has been lower than the previous high, and each major low has also been lower then the previous low. Granted, the drop to each of the lows can be a little hair-raising. Hence the roller-coaster analogy. The last rise was generated by a 3-week long European bank stress test boondoggle that few give credibility to.  

 Have a look at this chart of the S&P500 index year to date…

The right half of the chart shows the roller coaster ride. From a market technician’s point of view, when we see a pattern of lower highs & lower lows, it is a time to expect another leg down.

 The highs and lows (S&P500 value and date) are as follows:

• high 1217 April 23rd
  • low 1110 May 7th
• high 1171 May 12th
  • low 1050 June 7th
• high 1117 June 18th
  • low 1022 July 2nd
• high 1115 July 26th   

There have been large swings on this ride, but it has managed to lose 1.2% year to date (and 30% below where it was in 2007, and 28% below where it was in 2000). This market is acting like it did in the summer of 2000, 2007, and 2008 in terms of its volatility. That is a good segue… With respect to the S&P500 stock market index, guess which quarter had these 2 attributes:

• earnings was the highest ever recorded — before or since.
• Wall St analysts were forecasting continued growth and higher still record earnings.

I’ll give you a hint. It was the worst possible time to go long on US stocks in the past 70 years.  The answer: summer 2007. 2Q earnings were announced as now – in July & August.  If you heeded the Wall St cheerleading machine in the summer of 2007, you increased your stock positions right before the stock market peaked in October 2007. Exactly the wrong time.    The second most obvious example:  remember the historic stock market collapse in 2000?  The US stock market hit an all time high up to that point in time. Not surprisingly that corresponded to the previous peak in earnings. The Wall St machine was saying the same thing in the summer of 2000, the summer of 2007, and right now.  That is:  an all-time peak in earnings is next year.