Wednesday, April 15, 2015

Historic Market Strength or the Start of a Bear Market?

Jesse Felder looks at the stock market from the vantage point of historical valuation and finds us in rarefied territory.  Using other measures, Jesse Colombo arrives at a similar conclusion.  This strikes me as tremendously relevant for investors.  From a timing vantage point vis a vis shorter-term traders, I have more questions.  Prior to the large drops we saw in 1998, 2000, and 2007, for example, we saw a ramping up of volatility (VIX) and stocks making fresh new lows.  In other words, rises in volatility and weakness in leading sectors preceded those bear markets.  I'm not seeing those things at present, but the possibility that we're operating on borrowed time strikes me as a valuable one to entertain.  I'm just not sure we can expect historically normal market cycles when we have extraordinary global monetary policies. 

An extraordinary wealth of economic information and perspective is offered by Jeff Miller at Dash of Insight.  Measures he tracks suggest a healthy degree of strength in the economy.  He also raises the issue that bear markets tend to occur late in hiking cycles, not early.  Again, it may be difficult to extrapolate from past cycles to this present, extraordinary one, but Miller also notes that overvalued markets can become quite further overvalued before they run into trouble, citing data from Capital Speculator.

What we see is that intelligent market observers see the market quite differently.  My synthesis of all this is that we are historically overvalued *and* we're not yet seeing worrisome economic or market weakness.  Perhaps the best synthesis of all, however, is to go to websites such as the above and track down the original sources of data and the links from recent posts.  You are guaranteed to find intelligent perspectives that will broaden your own.  

Further Reading:  Creativity and Trading