In a stock market that has gone up and up and up, any time soon investors who are skeptical about this rise will show up. These so-called bears are skeptical about the valuation of stocks. And they do not believe that there are circumstances that make this particular bubble different from all those bubbles in the past that snapped. But given the situation, it is hard to believe that a full army of bears has not gathered in the last couple of years. In the figure below, the NASDAQ is plotted on a logarithmic scale to account for the exponential character of economic growth. We take the NASDAQ as our example, because it is the index that is the most sensitive to market swings. If you take this graph into consideration, you might think that all bells should be ringing and all flutes whistling. We are currently at levels that exceed those outrageous valuations characteristic for the internet bubble of almost twenty years ago. Bears, enter the stage…
But crucial in the passage above, is the fact that the last true bubble was almost twenty years ago. Although inflation has been low since, it has made life more expensive nevertheless. The price of stocks has also been subject to inflation. In the picture below we factored in the effects of inflation. And from the resulting graph, we might get a better understanding why bears have not yet crowded the stage.
Yes, stocks are expensive. Yes, you might even argue that stocks are more than expensive. But, no, from a historical viewpoint, stocks are not alarmingly expensive. It is unlikely that a stock market crash will be caused by overvaluation in the short term. But it might be something else, something only a few will have seen coming… Cryptocurrencies? North Korea? Sub-prime personal and car loans?
Major US indices made some small gains yesterday, but were able to close at all-time highs nevertheless. The Dow Jones ended 0.18% higher, the S&P 500 added 0.08% and the NASDAQ gained 0.09%. Volatility showed a mixed picture: the VIX closed with a small loss: -0.76%. But UVXY ETFs and XIV ETNs saw bigger movements: the former lost almost 7% and the latter gained more than 3%.
Danny Daredevil‘s hard times keep going on: his RSS dropped to 47%. Adventurous Anny is still behind the scenes and her RSS remains unchanged at 4%. Solid Suzy and Lazy Larry are enjoying the good mood among investors and their RSS rose to 35%.
None of our models gave a trading signal at the end of yesterday’s session.
RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return
The Chapel Family – Episode 11