It's not quite time to strike up the band if you are short the market, but Friday's SEC charges against Goldman Sachs (GS) for fraud may have put the brakes on the market's rapid rise the last two months, if not last year, especially if you take into consideration the cockroach theory. For those not initiated with the cockroach theory, our friends at Investopedia will give us a quick definition: "A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that there are many more that remain hidden.". Goldman Sachs (GS) is probably not the only bad actor in the drama that has been unfolding since 2008. The SEC may very well have their sights set on other ne're-do-wells in the investment banking community which only causes more distrust and angst on Main Street. Retail investors reluctantly coming back into the market was a big reason the pundits thought the market could ratchet up another leg. That is now a dubious proposition. The genie is out of the bottle.
There is that famous line by Gordon Gekko played by Michael Douglas in the movie Wall Street that goes something like: "If you want a friend, get a dog.". It's too bad we have to stereotype investment bankers this way, but a few bad apples at white shoe firms like Goldman Sachs (GS) have done a lot of damage to the IRA's, 401(K)'s and pension plans of many middle class Americans. No matter how well-heeled these bankers are, they should be held accountable for the damage they've done. Just when the market is going gangbusters and people are recouping their losses, the SEC has a score to settle and this is going to take us back to square one. At least that's how I see it. It may not happen overnight. It may very well take a few more months of treading water, but this market is going down. I don't want to rain on anybody's parade or sound like a Dutch Uncle, I'm just examining the facts and, fundamentally, the market is extremely overvalued. It just needed an excuse to correct and this may be the catalyst I've been looking for.
We all know that Mother Nature can be a cruel mistress, and another wild card here to stop the levitation of the market is the volcano eruption in Iceland. Air travel over most of Europe has come to a standstill - no imports, no exports, at least by airplane for the foreseeable future. That can't be good for business. Our economic relationship with Europe is no shotgun wedding. The short squeeze that took place the last two months that goosed the price of stocks may well be over. The locomotive may very well have jumped the tracks and diverged from the predicted path of DOW 12,000 by early Summer as some pundits have projected. You don't feel like you've been had with the volcanic eruption like you do with the Goldman Sachs (GS) grift, but still, it could very well put the market in give back mode. We'll see what happens this week. There are still a lot of earnings to go through and the market is sound according to the technicians. It is fundamentally where the market is weak such as the high P/E ratio and low dividend yield that I've been writing about.