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Monday, January 8, 2018

Daily update 1/8 Bubbles

A little more up.  No price is too high!

If we keep going like this forget the moon we are headed to the sun!  Breadth was +55%.  New highs came in at 237.  New lows were 20.  Slightly elevated for a new high.

The futures remain in accelerated up move mode.

Pretty steep price pattern since the start of the year.  Since 1950 SPX has been up more then 2% in the first 5 trading days 16 times.  The prior 15 instances saw SPX close positive for the year with an average gain of around 18%.  Will history repeat or will this be the one time it does not?  None of those other instances happened after SPX was up 9 years in a row (9 ties a record).  History will be made whether we are up or down at the end of the year.  Last year we started out with everybody bullish talking about animal spirits and we had a strong year.  This year we are starting out bullish with everybody talking about tax cuts.  Will we repeat with another strong year?  To be honest I don't know what to think.  The U.S. economy looks ok.  If anything bad were to happen it would likely come from outside the country.  ECRI says the global economy is slowing a bit, but how much it might slow seems unknown.  Valuation is high, but that has clearly not stopped people from buying up to this point.  Nobody is worried.  Whether they should be remains to be seen.  Maybe we have another smooth sailing up year.  Maybe not.  Time will tell.

Here are a couple articles on bubbles and a market melt up.
Bracing Yourself for a Possible Near-Term Melt-Up
Fear no bubble: They’re the best investing climates
I got a kick out of this part.

I understand the current environment may feel frothy, and uncomfortable. But these are the phases that create wealth.

Bubbles do not create wealth.  Everybody cannot get out at the top.  On the flip side they create a lot of lost wealth and misery after they pop. 

I still hear people claiming individual investors are under invested in stocks (aka most hated bull market ever).  I have long maintained that has not been the case for many years.  This chart indicates it is now the second most loved bull market in modern times.

AAII now says stock allocations are the highest since the late 90s.  Clearly well above the peak levels seen in the last bull market in 2000s.  The peak back in the 90s was 77%.  Still a ways to go to break that record.

The margin debt/GDP level was only higher once in all of history and that was 1929.  Take a look at the monthly SPX chart.

Valuations are about as high as 1929, and 2000 two periods of time which everybody agrees were bubbles.  Sentiment is clearly plenty high for a bubble.  Looking at the SPX chart how can we say we are not in a bubble yet.  Whether the market keeps going up or not, after it crashes it will widely be accepted we were in a bubble.  Are you smart enough to get out at the top?  I am pretty sure I won't be.  The leverage in the system means a crash is baked in the cake.  The only question is when and what level we reach beforehand.  I keep having this nagging feeling we won't have the usual signs of a top when this bull market ends.  There could be a very sharp reversal at some point. 


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