Posted on 04/19/2021 10:09:36 AM PDT by SeekAndFind
There is no way this bull market doesn’t end very badly. We all know that is the reality of this liquidity-fueled market, but we keep investing for “Fear Of Missing Out.”
An excellent example of investor exuberance came recently in “Investors Go All In:”
“More importantly, over the past 5-MONTHS, more money has poured into the equity markets than in the last 12-YEARS combined.”
If that chart alone doesn’t get your “Spidey senses” tingling, I am not sure what will. However, I have a few more charts to share with you.
In the short term, fundamentals don’t matter. Such is because over a few days, weeks, or even months, what drives prices higher or lower is the psychology of investors. As such, we can look at technical deviations to determine how exuberant or not the market currently is.
For moving averages to exist, prices must trade both above and below that average. As such, moving averages act like gravity on prices. When prices deviate too far from the moving average, eventually, prices will revert to, or beyond, that average.
We can visualize the reversion in the chart below of the S&P 500 index versus its 200-dma. With the index currently more than 14% above its 200-dma, such should be a short-term warning to investors.
The following chart says much the same. Currently, the 50-day moving average is also significantly deviated above the 200-dma. Such suggests that not only will prices retest the 50-dma but eclipse that level in a reversion back to the 200-dma.
Notably, technical deviations in the short term do NOT mean the market will “crash” tomorrow. Markets can remain deviated for quite some time. However, when the deviations begin to diverge from the price index negatively, such has previously preceded more important corrections and bear markets.
“Margin debt isn’t an issue. It provides the fuel for asset prices higher.”
That is a correct statement.
Rising levels of margin debt are a measure of investor confidence. Investors are more willing to take out debt against investments when shares are rising. The more prices increase, the more they can borrow. However, the opposite is also true. Falling asset prices reduce the amount of credit available, and the liquidation of assets must occur to bring the account back into balance.
As discussed previously, “negative cash balances” are at a record.
I want to make a critical point here. Margin debt, like valuations, are “terrible market timing” indicators and should not be used as such. I agree and disagree that margin debt levels are simply a function of market activity and have no bearing on the outcome of the market.
As we saw in March of 2020, the double-whammy of collapsing oil prices and economic shutdown in response to the coronavirus triggered a sharp sell-off fueled by margin liquidation.
However, since then, the surge in margin debt has reached extreme levels. More importantly, as shown in the chart below, it isn’t the “level” of margin debt that reflects investor exuberance but rather the rate of change. In this case, we can see a very sharp spike in debt from the previous 12-month low. Such has only occurred near previous market peaks and bear markets.
As Jason Zweig recently penned:
“Where ignorance is bliss, ‘tis folly to be wise,” wrote the British poet Thomas Gray. One of these days, perhaps sooner rather than later, stocks will stop going up and the importance of understanding what you own will reassert itself. For the time being, though, investors who used to think of themselves as wise may continue to look foolish.”
As stated above, in the short term, fundamentals do not matter. However, in the long term, they matter a lot.
Currently, investors are overlooking fundamentals on the expectation the economy and earnings will improve to justify the market overvaluation. There is scant evidence over the last 20-years such will be the case.
The “Economic Activity Index” is an average of the 4-most essential components of organic economic activity. Interest rates have a long historical correlation to economic activity, along with inflationary pressures. Without productivity and business investment, jobs do not get created to support consumption which is ~70% of the GDP calculation.
Through the first quarter of 2021, the economic recovery expected by economists is running well ahead of what the index approximates. Furthermore, given much of the market’s advance is based on optimistic expectations, there is potential for disappointment.
Such is where fundamentals become extremely important. When, or if, expectations of recovery are disappointed, the market will begin to reprice itself for its intrinsic value. Given that the market is currently trading more than twice the level of underlying economic growth, which is where corporate profits come from, such suggests a significant risk.
The level of price versus sales, which occurs at the top of the income statement (and much less subject to manipulation, also suggests a risk.
10-year forward returns are below zero historically when the price-to-sales ratio is at 2x. There has never been a previous period with the ratio climbing to near 3x.
Of course, with markets trading well above 20x earnings, history further suggests that investors are likely to be disappointed in the future as markets reprice value.
Such is particularly problematic when investors chase stocks with no profits.
What could go wrong?
While we remain long-biased in our equity portfolios, we are chasing performance like everyone else. As I noted in “Fully Invested Bears:”
“While the mainstream media continues to skew individual’s expectations by chastising them for “not beating the market,” which is impossible to do, our job is to participate in the markets with a bias toward capital preservation. As noted, the destruction of capital during market declines has the most significant impact on long-term portfolio performance.
From that view, as a portfolio manager, the idea of ‘fully invested bears’ defines the reality of the markets we live with today. Despite the understanding that the markets are overly bullish, extended, and valued, we must stay invested or suffer potential “career risk” for underperformance.
Such is the consequence of the Federal Reserve’s ongoing interventions. Portfolio managers must chase performance despite concerns of potential capital loss. In other words, we are all ‘fully invested bears.’ We are all quite aware this will eventually end badly. However, in the short-term, no one is willing to take the risk of being grossly underexposed to Central Bank interventions.”
While it certainly may “feel” like the market “can’t go down,” it is worth remembering the sage words of Warren Buffett.
“The market is a lot like sex, it feels best at the end.”
We remain “bullish” on the markets currently as momentum is still in play. However, we are also continually taking precautions to monitor and manage risk accordingly.
For us, that means putting a spin on Warren’s quote:
“If you engage in the market in an unprotected fashion, you may not want the unexpected surprise.”
For me, I'm covered for so long as I live in retirement according to the 4% rule. Should I kick off early, my wife and kids are covered. I'm okay with either outcome but of course I prefer the first option!
I tell my kids I intend to outlive my money so they better save for themselves just in case.
Meh, live your life your way, I’ll live mine my own way.
The economy, nor the world, isn’t coming to an end anytime soon, and I choose to regard those who believe otherwise as fools.
A drop 10,000 or 15,000 would be a triviality except to the kind of idiots that panic or only think in terms of months or a year or two.
The market is the only place where you have hordes of idiots running OUT of the store when there’s a sale on.
But there are always people looking for the ‘End Times’, be it theological or economic, I pity them but not enough to refrain from taking their money or laughing at them.
Well you never know when your life will end, unfortunately.
Meh, live your life your way, I’ll live mine my own way.
I don’t know when the whole thing is gonna come down, but I do know this: The rate of change for the whole thing in the last 20 years has been breathtakingly rapid. This pace is not sustainable. Something’s gotta give, and few know how that will happen. If one is engaged they have the chance of being excitingly right or terribly wrong. If they are not engaged, they will just be a part of the masses in one way or another.
But we are on the cusp of massive change. I’m talking Russian recvolution or WWII change. Some were made rich by the latter, so it can happen. :)
Well, people believe that, just like they believe in a Rapture; utterly idiotic in my opinion but it’s a free country.
The only Absolute I know is that my shares of my S&P index fund will be worth more in 30-40 years than they are now.
Too many people want drama, or resolution, or see things in linear rather than circular fashion, always looking for a ‘beginning’ or an ‘end’.
Believing in a ‘massive’ change is just like believing in the Second Coming, it’s a belief, if it makes your life better great, I believe in nothing that can’t be measured and quantified, and over the last more than a century the market has gone up.
I kind of want a moderate crash, 5-10K, just to put a hurt on the idiots who are greedy and only think in terms of months or years rather than decades. If it drops back to 20 or 25K I’ve got a few hundred grand ready to go in.
I know people who did that and it wasn't the best decision. Even when you are wanting to save every possible dollar for retirement, you still have to live for today. Because you never know how much time you've got.
Leaving a legacy for your children is nice but you should not have to sacrifice your standard of living to do so.
Wonder if it will put a crimp on some of the D.C. tribe insider trading oh never mind.
Cart to trade for some Pontiac stocks.
Back in the '70s I worked under Civil Service regs and was able to take 3-4 week vacations each year. Always took the wife and kids sight-seeing cross-country, including the Trans-Canada highway.
One year I told my boss what we did and he got a funny look. He said "You're doing stuff I plan to do when I retire." He was putting his time into his avocado ranch in Escondido, CA.
Finally sold out for $1/4 mil (big money in those days). Took off on a holiday and got as far as St. George, UT (just inside the southern border) and had a debilitating heart attack. So much for deferred time off.
I like the way things look long-term. Putting my money where my mouth is. Let the sheeple flee the market,, more for me.
Gunter gleiben glauchen globen
They are factors, but minor ones.
We’ll see in 10-30 year’s time ;-) cheers
The only Absolute I know is that my shares of my S&P index fund will be worth more in 30-40 years than they are now.
And the Detroit Lions still will not have won a Super Bowl.
At the end of the day it really doesn’t matter, in the way of “you can’t take it with you. And wouldn’t it be interesting if the bottom DID fall out of the world and that legacy he left allowed his kids and grandchildren to survive when they otherwise would not have.
That’s a long shot, but we don’t know the future, and sometimes what appear to be boneheaded decisions turned out to be exactly the right decision for the time.
I’m not sure we have seen these valuations since the 1092x. It’s a little bit crazy. Money supply is sky high. Velocity is very low. The new part of the equation is FED interest rates.
My mind says lock in gains buy back in after the correction. My greed says let it roll. The no one loses stock marker where the shoe shiner can pick winners says a lot.
I told my daughter I am going to try and spend every single dime so that the only thing she’ll get when we’re gone is the paid off house. She said....have fun!
we still have a mortgage and thinking strongly of just pulling money out to pay it off....two good things...mortgage gone and using some of this bull market before it goes down...(monthly mortgage payment is pretty low, but still)
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.