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There has been talk of a stock market bubble almost since the last stock market bubble burst. I understand why, it’s good business to try to scare people.
The problem with most of the bearish calls the past 9 years has been that most were very backward-looking, incomplete in their thought process or outright political. In my opinion, most bubble callers miss the fact that central banks have created enough money to permanently raise support levels for markets, as well as stimulate economies through inflationary policy.
After years of the stock market rising, with only a few hiccups, today, we are seeing a stock market in rally mode again, this time in response to a tax cut bill. While I am no repetitious bubble caller, multiple quant systems I use are now indicating that this bull market is about to cross into some very dangerous territory. That is on top of Goldman Sachs warning that valuations are at highs not seen in over a century.
It is my opinion that the final phase of this bull market has restarted. I say restarted, because it is also my opinion that the oil crash is the only thing that stopped a bear market in late 2015 or early 2016. If I am right, and we delayed a bear market a couple years ago, then those buying today are the final “greater fools” and they are going to be blaming somebody else for their misfortune soon.
Bubbles Take Awhile To Pop
Back in the spring of 2009, I went bullish just as the final stock sellers had their final capitulation. I stayed bullish until spring 2015 when I went to a more cautious, but not bearish, stance. Call it neutral if you need to give how I’ve felt since then a name. In one column on MarketWatch I discussed how big investors were slowly selling to small investors:
People who heeded my advice to raise some cash were able to buy a basket of stocks just a few months later on a “flash crash.” I told subscribers of my investor letter to buy ten stocks the morning of August 24, 2015, or to buy the PowerShares QQQ (QQQ) for simplicity. That worked out well.
I made the mistake of selling that basket of stocks too early as I did believe that a bear market was beginning back then. What I didn’t recognize was the fact that crashing oil prices were providing a massive QE-like stimulus to the economy, and by extension stocks, as money rotated from energy to other asset classes. Even the quant signals I use gave a sell signal that could have just as well been skipped (though the system redeemed itself, just like in 2011, by re-entering stocks at a slightly lower price level).
Chart courtesy of markettrendsignal.com
What you should take a look at in the chart above is the big green arrow at the top right. Market momentum is screaming higher again and that NEVER ends well. The plodding market that we had for years and years was healthy as money entered slowly and cautiously. Right now we are seeing people chase returns, which is a recipe for disaster.
Breadth, Momentum and Sentiment
I am not married to quantitative or technical analysis; however, those are the fourth leg in my “Core 4” investing method for important reasons. After analyzing macroeconomics, government and central bank policy and company/sector fundamentals, a respect for asset price trends is a key to synthesizing investment thoughts.
People who do not use quantitative or technical analysis are making vital mistakes, in my opinion. The first, and most important, is that they don’t really respect the markets. They believe their analysis is all that matters. Millions of other brains and computer brains move markets though. Analyzing the pricing and money flow data can yield great insights into whether or not we truly have our analysis of an asset or asset class correct.
Right now, there is no sell signal on the broad markets; however, the requisite conditions are just about to occur. If market breadth, i.e. participation, rises above momentum while sentiment is above breadth, then one of those down red arrows will appear. Sentiment is above breadth right now and breadth is closing in on momentum.
I know somebody will scream “market timing” in the comments and I’ll just say here that is wrong. Quant analysis takes into account a lot of factors. The one I pay attention to the most is money flow. Who is buying and who is selling. That is important information.
In the article I linked above, I talked about how big money was selling to small money over two years ago. That is likely to be the case again come January, in my opinion, as big investors push gains into the next tax year. I am very close to being a seller of the broad S&P index (SPY) (VOO) because money flow is likely to turn over soon. When it does, I will issue a sell signal. Until then, party on, what can go wrong?
For the record, I am about 25-33% cash in client accounts and have recommended that subscribers to Margin of Safety Investing get to those cash levels by about Christmas time.
Through New Year’s Eve, “Margin of Safety Investing” will be available to new subscribers for only $365 per year. On January 1st, the rate rises to $499/year. I use access to multiple top research and analysis services, combined with my “Core 4 Investing Method” and insights of 25+ years of experience to find some of the best asymmetric opportunities with the least risk possible. See my top-ranked history on TipRanks and read archived articles at MarketWatch where I was named “The World’s Next Great Investing Columnist.“
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own a Registered Investment Advisor (https://BluemoundAssetManagement.com), however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.