FOLLOWING UP ON THE “SCREAMING BUY” SIGNAL FROM OCTOBER 30th
When we left off on October 30th, I posted an interesting study that pointed to the markets being a screaming buy, with an average gain of close to 17% over the next 12 months. Being that we are up roughly 10% since the study was posted, I thought it would be appropriate to post a follow up, along with some relevant notes. Let's start off with a philosophical discussion: Bull markets are meant to be invested in not traded. There is more money wasted and opportunities lost by investors who simply attempt to avoid the pain of a pullback in a bull market. The pain and pleasure of the ebbs and flows of bull markets shouldn't be avoided, but rather, understood. The understanding comes in the form of observing the natural tendency for markets to correct while knowing a correction does not constitute a secular reversal. It has been 6 years I have been telling any investor who would listen that this bull market should be bought and embraced for sometime to come. That message has not changed and it will not change at any point on the near horizon. There are still multiple years of gains ahead, into the end of this decade and perhaps further. In fact, the upside from here remains on par with the potential I saw in 2011, when the Nasdaq was at 2500. In the meantime, the markets are at a complicated inflection point. We are up against some substantial resistance areas but sentiment is just beginning to turn into the bullish camp on a long-term basis. Typically when that sentiment turn occurs there is a prolonged period where what is obvious becomes obviously right. In other words, contrarianism fails while consensus excels. That was the point I was attempting to convey in the article from October 30th, titled An Unorthodox L0ng-Term Indicator Is About To Scream Buy Going back to the same indicator mentioned in that article, the 260 and 600 day moving averages of the put/call ratio, you can see in the chart below that the crossover just happened. Again, this indicates we are entering into a period when consensus bullishness will prevail much to the disappointment of contrarians: Next up, we have the Dow, which has broken out above a key trajectory point with this recent run since November. This is a very real breakout with significant ramifications. This is the beginning of the second leg up for this bull market that has the Dow moving much higher over the next 2-3 years. The stick in the wheel comes in the form of the Nasdaq which is camping...
THE BRILLIANTLY PERILOUS TIMES AHEAD
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. A sense of absolute clarity has suddenly developed within the minds of investors in U.S. equities. A clarity as to the future of the economy. A clarity as to the future of the markets. A clarity as to the future of their own personal fortunes. This clarity has been thrust upon the hearts and minds of investors from one source: Government. The changing of government that will take place in earnest later this month ushers in an incubator-esque, pro-business environment that the country has never experienced. It is only appropriate that in the face of pro-business policies, designed by individuals who have a lot of money, for people who want to make a lot of money, that the markets would applaud loudly by driving up equity prices to record levels over the past couple months. That very same comfort and clarity, however, creates some of the most perilous conditions we have had in all the time the markets have been advancing since 2009. There is a premium that has now been baked into the market based on governmental policy and action. In the past years, we have only seen premiums baked into the market for earnings and monetary policy reasons. The current affinity for fiscal policy, whether in the form of stimulus or deregulation, reflected in the premiums individuals are suddenly willing to pay for stocks, changes the game completely going forward. Investors have now tied themselves to a group that has influences from an infinite number of outside groups that have contradictory interests tied to numerous other groups. This is no longer a game if earnings are good then markets will rally; if monetary policy remains accommodating then the markets have a base from which to rally; if geopolitical and macro uncertainty stays out of the picture then the markets will appreciate in value. Things just got a lot more complicated while investors have become extremely comfortable with their investments. How comfortable? Take this comment from the CEO of Trimtabs as one example: “The stampede into U.S. equity ETFs since the election has been nothing short of breathtaking. The inflow since Election Day is equal to one and a half times the inflow of $61.5 billion in all of last year.” Investors, in other words, have digested all of the positive soundbites coming from various media sources and have concluded unanimously that they are underexposed to equities. And this note from Bank of America courtesy of ValueWalk: ETF buying by Bank of America’s retail clients was the fourth...