7 Reasons The Bear Market Has Just Begun

On March 10^th 2009 the US stock market hit an intraday low and put in the now-famous “Haines bottom”–coined after my friend, the late great Mark Haines, who made one of the most prescient calls in market history. It should be noted by the time that fateful day arrived it was virtually impossible to find a single bull out of all the geniuses on Wall Street.

Since then the major indexes have more than doubled. Therefore, today the narrow-minded canyons of Wall Street are littered almost entirely of trend following bulls and cheerleaders that don’t realize how little there is to actually cheer about. Stocks values are far less attractive than they were on that day back in 2009 and this selloff has a lot longer to run. There are hordes of perma-bulls calling for a “V” shaped recovery in stocks, even after multiple years of nary a down tick. But the following are seven reasons why I believe the bear market in the major averages has only just begun:

1. Stocks that were hated in 2009 are now unconditionally loved. This is clearly evidenced by margin debt which recently reached an all-time high. According to the National Inflation Association, margin debt recently jumped over $30 billion, or 6.5% to $507 billion, which was equal to a record 2.87% of U.S. GDP. This surpassed the previous all-time high of 2.78% set in March 2000–the top of the largest stock market bubble in world history. And despite the assurance of many fund managers that investors have boat loads of cash ready to deploy at these “discounted” prices, cash levels at mutual funds sank to their lowest level of just 3.2% of assets by early August. That’s the lowest in history! As a percentage of stock market capitalization, fund cash levels are also nearing the record low set in 2000 when the NASDAQ peaked and subsequently crashed by around 80%.

2. Stocks are overvalued by almost every metric. One of my favorite metrics is the Price to Sales Ratio, which shows stock prices in relation to its revenue per share and omits the financial engineering associated with borrowing money to buy back shares for the purpose of boosting EPS growth. For the S&P 500 this ratio is currently 1.7, which is far above the mean value of 1.4. The Benchmark Index is also near record high valuations when measured as a percentage of GDP and in relation to the replacement costs of its companies.