Four Years Into a Bull Market: Where Do We Go From Here?
After multiple bubbles and busts, will John Q. Public ever trust the stock market again?
Hi, welcome to the future. San Dimas, California, 2688. And I'm telling you it's great here. The air is clean, the water's clean, even the dirt, it's clean. Equity averages are way up, mini-golf scores are way down. The last 20 Tuesdays have seen positive action, and the Dow Jones Industrial Average hasn't suffered a three-day decline in 113 years! I'm telling you this place is great!'
-- Rufus, Bill & Ted's Excellent Adventure
I took some liberties on Rufus' speech -- let's call it poetic license -- but it sorta sums up the state of market psychology.
I wrote a few weeks ago, in The Most-Hated Rally of All Time, that "in my 23 years of trading equities, I don't believe I've ever witnessed this degree of directional certitude before." I also shared that the upside is now as obvious as the downside was in March 2009. We were early to the bull camp back then -- about a month, which was 15% of real downside pain -- before the market embarked on what has morphed into a 150% price rise fueled by the central bank sanctioned steroidal needles.
I'm not one to make excuses -- never been my style and it's one of my pet peeves, along with arrogance, loud chewers and long lines -- and I won't make one now. I had a total right hip replacement one month ago tomorrow and it's been a long haul (complete with scary falls). I attempted to work through the surgery and recovery, to a fault. I wasn't as lucid as I otherwise might have been and I'm reminded of that every time I look at the YTD performance in my trading account. I own that; it was a mistake that has since morphed into a lesson.
I won't go as far as to say "I'm back," because the last few times I did that it proved to be premature. I will say that I am off the pain meds (slightly ahead of schedule), I begin outpatient PT today (should be fun) and I'm expecting to ease back into Minyanville headquarters a few times next week, in front of my meeting with the surgeon the following week, where we hope and expect to get the "all-clear" (to commute, not run marathons). In other words, it feels like I'm over the hump, both in terms of pain, recovery, and the ability to think clearly.
In terms of the tape, I shared some thoughts yesterday on the Buzz & Banter (click here for a free trial!) that bear repeating, as they sum up my current frame of mind as it pertains to the stock market. The thoughts were triggered after I read an interesting article on Bloomberg, Record Cash Sent to Balanced Funds Amid Stock Rush.
Of particular note was a quote from Michael Holland, chairman of Holland & Co, which oversees about $4 billion. "It shows the early stages of the healing process and reduction in the still pervasive negative psychology about the stock market." He continued, "We're four years into a bull market and levels of stock ownership remain very, very low."
Therein lies the rub, right? On one hand, we're in the "early stages of the healing process" despite the fact that we're four full years into the rally. And again, I believe an asterisk is appropriate when discussing this particular rally, much like one was needed when Roger Maris hit his 61st* home run. The game has changed and it's not "fair" to those who played with different rules earlier in their careers.
The S&P (INDEXSP:.INX), as discussed, is now 150% higher than it was in March 2009 -- four years ago -- when the government endeavored upon the single biggest experiment in financial market history. To be sure, after a decade of bubbles and busts, one that repeatedly screwed savers at the bottom and punished investors at the top, one could understand if John Q Public opted -- or continues to opt -- to sit this one out, recent data notwithstanding.
Burn me once, shame on you; burn me over and over and over again in tech stocks, real estate, crude, China, and now the widely perceived central bank call option and, well, Arnold Diaz would have a field day.
But there are two sides to every trade, and even the most fervent bears -- those chanting "cumulative" and "disconnect" and "synthetic" -- would be wise to know what their counterparties are thinking.
What if -- and I'm just putting this out there -- what if, after gobbling up trillions of dollar in bonds, the government simply held those assets to maturity and subsequently wrote them off, much like Cisco (NASDAQ:CSCO) , Dell (NASDAQ:DELL) and Intel (NASDAQ:INTC) did during the go-go days after Y2K, when they wrote millions of out-of-the-money puts in lieu of buying back stock (when the premium expired worthless, there were tax advantages; when they finally didn't -- after the tech crash -- there were write-offs galore, and that was that).
I have unsuccessfully attempted to trade around a short bias -- should we take out last week's highs, I will euthanize those S&P puts -- so this is nothing more than me trying to make sense of the current price action. "Don't fight the Fed," and "it's different this time," is more rationalization than reason in my book, but price is the ultimate arbiter of variant financial views so I respect -- but will not defer to -- the bull. He has been partying like it's 2003, sucking down the Kool-Aid and not worrying about the "other side."
I will say this, however: If four years is indeed "the early stages of the healing process," I sincerely hope that the recovery eventually shifts from the stock market to the economy and finally to the most important dynamic, in my view, social mood as from where I sit, there is a pretty massive chasm between what the markets are telling us about the state of the world and what the world is telling us about the state of ourselves.
Make decisions for yourselves, for you will bear the consequences, and look forward, not backward, for that is where profitability resides.
Good luck today.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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