If you would like an email sent to you when I update the blog please send an email with "subscribe" in the subject line to traderbob58@gmail.com. To be removed use "unsubscribe".

Search This Blog or Web

Friday, November 15, 2013


I have seen quite a bit of talk lately about whether we are in a bubble or not.  Most of what I see is like this quote:

Are we currently witnessing a market bubble?  It is entirely possible, but if it is it will be the first market bubble in history to be seen in advance.  From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come.


I actually like reading the guy that wrote that.  He makes a lot of good points and is usually pretty fair in his analysis.  However, this time he is dead wrong.  Every bubble in history has been recognized by some people, but ignored by the majority.  Think about it.  People talked of a stock bubble in 2000.  There was plenty of talk about a housing market bubble in 2006-7.  There are things that show there is a bubble mentality in the markets.  Bitcoin for example.  Bitcoins exist in the imagination of people and can go away at the drop of a hat.  And yet people actually pay money for them.  There is some company selling shares in athletes future endorsement revenues.  Really.  Athletes that can get hurt at any time and totally disappear from the endorsement scene. Or maybe they just do something stupid and nobody wants them for their products anymore.  That never happens, LOL.  I have seen junk stocks do nothing this entire bull market all of a sudden running up 100% or more in days.  This is bubble mentality people.  Now all the talk about being in a bubble just confirms it.  Think about this very hard.  In your life time has there ever been bubble talk about a market that did not actually turn out to be true?  I can't think of one myself.  The question is not whether we are in a bubble or not.  We clearly are.  The question is how close to the end of it are we.  That is the only question that matters.  This is not a party you want to be the last person to leave from.

There is a belief among almost all market participants that another big decline cannot happen.  The usual reason is valuation.  The trailing 12 month P/E for SPX is now nearing 19 which is actually higher then it was at the top in 2007.  Other indexes are much worse.  Check out this latest update.

There is no index in this list cheap.  They are all high.  Notice the Russell2000.   There is no way that a 75 P/E is not a bubble mentality.   Low interest rates just won't cut it as a rationalization.  This is a bubble.  We just need to figure out when it is ending and get out of the way.  I know I got a little crazy early this  year looking for a top.  That is because I was thinking with my heart and not my head.  I apologize for that.  I was hoping the next bear would hit before the indexes made new highs and sucked everybody in at the top.  I was really afraid the bubble mentality would return with new highs.  It has.  The result will definitely be another crash.  New highs within a secular bear market happened in 1973 and 2007.  The following bear markets ended up below the prior bear market low.  We now made new highs within a secular bear market.  Is a trip below the 2009 lows in the cards?  I know a lot of Wall Street people are telling us we are in a new secular bull market.  I believe they are wrong.  We cannot know the answer for sure until we get through the next bear market.  The monthly ADX is only 27.  That is still slightly lower then in 2007.  In order to signal a new secular bull market we need to see a bear market where the ADX declines.  From this low level I don't think that will be the case.  The truth is there is no valuation method or any technical indicator that indicates a major decline in stocks will not happen.  There is always a risk and anybody that says otherwise is either lying or stupid.  I believe the risk is much higher now then it was a year ago.  A lot of people have recently piled into the stock market at high levels.  Lambs being led to slaughter by all the Wall Street talk of sunshine and roses.  This will end ugly as before, the only question is when.


No comments:


The information in this blog is provided for educational purposes only and is not to be construed as investment advice.