The stars seemed to be aligned, leading many investors to be concerned about there being a bubble in the stock market. First, we've had one of the greatest rallies ever, with the S&P 500 rising from its low of around 666 on March 6, 2009 to crossing the 1,800 level on November 18, 2013, a price-only increase of about 170 percent. That kind of increase causes investors to be concerned that prices are "too high." You hear phrases like, "the market has gotten ahead of itself." Adding fuel to the fire is the concern that the Federal Reserve's easy monetary policy (both its policy of basically a zero Federal Funds interest rate and its bond buying program) has fueled an asset bubble.
The stars came into further alignment when Professor Robert Shiller, author of "Irrational Exuberance," was recently awarded the Nobel Prize in economics, bringing more attention to the question:
The third quarter earnings season came to an end Thursday now that Wal-Mart (WMT) has released its numbers. Of the 2,268 companies that reported this season, which started in early October, 58.6% beat earnings estimates. Below is a chart comparing this quarter's beat rate to past quarters since 2001. Since the bull market began in March 2009, this is the second worst earnings beat rate we've seen. Only Q1 of this year was worse.
(click to enlarge)
Coming into this earnings season, we had our eyes on two earnings-related streaks. The first was the 8-quarter streak of more companies lowering guidance than raising guidance. Unfortunately, the streak was extended to nine quarters this season, as companies lowering guidance outnumbered companies raising guidance by 4.5 percentage points. When will companies finally offer up positive outlooks on the future?
The other streak
After outperforming for months and months, smallcap stocks have gotten crushed over the last week or so. In fact, the smallcap Russell 2,000 index has underperformed the largecap S&P 500 for six days in a row now going back to October 25th.
Since the close on October 24th, the S&P 500 is actually up slightly, but the Russell 2,000 is down more than 2%.
To highlight the big divergence between largecaps and smallcaps, we ran our decile analysis on the Russell 3,000 based on market cap. To run the analysis, we broke the Russell 3,000 -- which is made up of largecaps, midcaps and smallcaps and contains 98%+ of investible US stocks -- into deciles (10 groups of 300 stocks each) sorted from the largest cap stocks to the smallest and then calculated the average performance of the stocks in each decile since the close on 10/24.
As shown below,