The S&P 500 may be entering bubble-like territory: that’s what I’ve been writing for the past few months.
Now, it appears as though I’m not the only one who’s worried about asset classes beginning to form bubbles from the excess money printing. 2013 Nobel Prize-winner Robert Shiller also recently stated that he is concerned that prices have risen far too quickly across many asset classes, from real estate to stocks.
As I’ve written several times over the past couple of months, investing in stocks at these elevated levels is quite risky. My belief is that much of the upward move in the S&P 500 has been primarily based on the liquidity (money printing) being pumped by the Federal Reserve.
Investing in stocks with this premise can only work for the very short-term trader who’s quick enough to get out when the tide begins to turn.
Because people are not investing in stocks based on actual fundamentals right now, one can’t expect the value in the S&P 500 to remain elevated once there’s a change in monetary policy, since much of the move has been artificially supported.
Let’s take a look at how the S&P 500 has been affected by monetary policy over the past few years, and how investing in stocks at the current level is becoming increasingly risky.
Chart courtesy of www.StockCharts.com
The first quantitative easing program by the Federal Reserve lasted from December 2008 until March 2010. This period is not shown on the chart above, as one could argue that the S&P 500 became extremely oversold and that investing in stocks for the long-term made sense at … Read More
Let me begin by first stating this: I’m not going to talk about the Federal Reserve in any detail, or about the holiday shopping season and how it’s so important to the retail sector and the economy because these don’t seem to be of any great concern to the markets.
The reality is that both traders and investors appear to be really comfortable at this moment with the record-high levels in the stock market. Take a look at the multiple records recently set by the S&P 500 and Dow Jones Industrial Average; you won’t see any sign of a pullback. Yet no one seems to care—even though this is all incredibly dangerous for the stock market.
This is simply not a normal trading environment for the stock market, since the Federal Reserve has largely been responsible for the record advances, as I previously discussed in this column on Friday.
A look at the CBOE Volatility Index (VIX), or the “fear index,” reveals the current multiyear low in the VIX, which we haven’t seen since 2007, prior to the subprime mortgage-driven stock market correction in 2008, The current low level of the VIX suggests that the stock market is relaxed and is not expecting any strong moves in either direction on the horizon. Looks like the market could be in for a surprise in the New Year.
Are traders simply too relaxed? The chart of the VIX below shows the big gaps between the VIX readings and the S&P 500.
In 2007, the VIX reading was below 10, but the S&P 500 didn’t begin to sell off until the VIX increased … Read More
In my previous article, I discussed the new record highs achieved by the stock market and how it looks like there will be more gains to come.
Yet based on what we have seen over the past few decades, something appears to be out of whack. I’m sure many of you also realize this seeming discrepancy but are happy to ride the stock market advance anyway.
Let me explain.
The six-month period from June to October has historically been the worst period for the stock market, according to the Stock Trader’s Almanac.
But the S&P 500 advanced by about eight percent in this period of supposed weakness. The stock market actually saw the S&P 500 and DOW Industrial rally to multiple record-highs.
It’s clear that something is out of whack, and that “something” appears to be a mispricing in the stock market.
If you believe in the historical tendencies—that is, despite the contradictory action in the June–October period this year—there will be more gains to come and more opportunities to make money. This means that it’s not the time to exit the stock market yet; instead, it’s time to look for opportunities to buy, especially on weakness.
The facts show that investing in the six months from November to May has produced the best returns for the stock market versus the June to October period, according to the Stock Trader’s Almanac.
So, having seen an eight-percent advance in the S&P 500 from June to October, should we expect to see an even bigger advance over the next five months to May? Based on what I’m seeing, it does look like … Read More
Reflecting on this past Thanksgiving weekend, there was a lot to be thankful for, especially if you have been long in the stock market for the past four years. Now is a time for reflection.
The advance in the stock market has been stellar following the bottom in March 2009. The S&P 500 is up 171% since March 6, 2009 for a four-year annualized gain of about 38%.
In Japan, the Nikkei 225 is at a six-year high and over in Germany, the benchmark DAX is also at a record high.
However, the records in the stock markets are falling, not just in good old America, but worldwide. Of course, there are the exceptions, such as China, which I still consider to be undervalued and worth a look for investors searching for growth in foreign stock markets. In China, you can play almost anything due to the country’s insatiable appetite for goods and services. Some of the top areas for growth in China are the technology, health care, travel, and financial services sectors.
Yet while all of the stock market records are being set, I wonder if this is simply the new reality for stocks, or are we just setting ourselves up for a massive hangover when stocks fall?
The Russell 2000, for instance, is a play on the economy. The idea is that small companies tend to fare better when the economy recovers, as these companies tend to be more flexible. The index is up over 35% this year and more than 40% year-to-date. That’s a great advance, but the index is also trading at over 70 times its … Read More
The more I view this stock market, the more nervous I get. While Wall Street gets set for some terrific year-end bonuses and investors take some amazing gains off the table, I’m sensing some euphoric buying in numerous areas of the stock market.
We saw what happened to hydrogen-cell car maker Tesla Motors, Inc. (NASDAQ/TSLA), as the high-momentum stock rocketed to $194.50 on September 30. The euphoric buying was clearly overdone and set for a nasty decline as short-sellers jumped in. Fast-forward nearly two months, and the stock has plummeted 38%, sitting at the $120.00 level as of Friday. And while some are blaming multiple engine fires in several Tesla cars, the reality was the stock simply accelerated much too fast on the chart to levels that were clearly unsustainable. Even now, trading at 80 times (X) its estimated 2014 earnings and with a price-to-earnings growth (PEG) of 11, the valuation is obscene.
Areas that I view as having some excessive run-ups and valuation in the stock market include the Internet services and social media sectors, which include such stocks as Facebook, Inc. (NASDAQ/FB), Twitter, Inc. (NYSE/TWTR), and Netflix, Inc. (NASDAQ/NFLX). These high-momentum stocks are excessively priced by the stock market, so investors should be wary of chasing them higher. As an alternative investment strategy, wait for the stock to come to you; in other words, wait for weakness in the stock market and for prices to decline before jumping into these investment areas.
The cloud services area in the tech sector has also seen some massive advances to the point where there is so much hype built into the … Read More