“STOCK PRICES ARE GOING TO FALL HARD”
by ilene - June 18th, 2009 1:16 pm
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Here’s another timely article from The Pragmatic Capitalist this morning – in agreement a couple bearish articles posted yesterday, Glenn Neely – 50% decline before end of year and This Trade Happens Only Twice a Year.
“STOCK PRICES ARE GOING TO FALL HARD”
Courtesy of The Pragmatic Capitalist
That’s what TrimTabs is expecting. They are out with some alarming data regarding the recent issuance of stock. While the laws of supply and demand don’t seem to be applying to commodities of late you can almost guarantee that the overwhelming increase in the supply of stock will keep a lid on stocks. A recent MarketWatch article reports:
Firms have recently issued far more shares of their stock (either through initial public offerings or secondary offerings) than they did even in the go-go years of the late 1990s and at the top of the Internet bubble in early 2000.
That’s not good news, from a contrarian point of view: The stock market historically has tended to perform poorly following periods in which firms have flooded the market with more shares.
Prior to May, according to TrimTabs Investment Research, the highest level of share issuance in a given month was $38 billion. May blew that record out of the water, with a monthly total of $64 billion.
Furthermore, that blistering pace has continued during the first two weeks of June, according to TrimTabs.
How bad an omen is this corporate eagerness to offer its shares to the investing public? Looking back through recent history, TrimTabs found that there have been just 12 months since 1998 in which total new corporate offerings totaled at least $30 billion. The average return for the S&P 500 index over the 90 days following those months was a loss of 4%.
Dissecting the data further, TrimTabs next focused on those months in which not only did total corporate issuance exceed $30 billion, but also those in which total corporate share purchases were less. The S&P 500’s average 90-day return following those months was a loss of 7%.
This more-narrowly-defined subset applies to today, unfortunately. According to TrimTabs, corporate new offerings since the beginning of May have been nearly five times greater than corporate
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site