Incredibly, the S&P500 rose again last week. This time it jumped by about 1.5%. Volume was very light….so no huge surge in investor conviction. And counter-intuitively, S&P VIX also jumped, suggesting that while the retail masses are comfortable owning stocks….and even buying a lot more….some more sophisticated investors and traders are buying downside insurance.
Was there some sort of surprising economic news to power the S&P forward last week? Nope, not at all. In fact, the last week’s reports were filled with disappointments. The Dallas Fed manufacturing survey missed, for example. But there’s much more—international trade in goods, the FHFA house price index, wholesale inventories, PMI manufacturing, and the ISM manufacturing index all disappointed versus expectations. On the positive side, new home sales, consumer confidence, pending home sales, personal income, and Chicago PMI and construction spending all beat expectations. So the bottom line is that the US economy has not suddenly improved, which could explain last week’s surge in US stocks.
Technical analysis is showing a US stock market that’s almost disturbingly overstretched to the upside. On both the daily and weekly charts, prices are literally moving off the charts…to the upside.
Meanwhile, valuations have now approached the two most overvalued levels in US history—the period just before the 1929 peak, and the period just before the 2000 peak. In both cases, crashes—massive crashes—ensued. But in the period leading up to those crashes investors were largely euphoric….and still heavily long US stocks.
And this same phenomenon is now occurring today. Specifically, investor psychology is now so bullish, that virtually all negative news can spark any meaningful selling in US stocks. On the contrary, any small “dips” are immediately bought, often within hours of the dips occurring. And keep in mind that some significant, and normally bearish, news has been released over the last several months. In geopolitics, North Korea is now literally capable of hitting the US mainland with a nuclear weapon. In terms of monetary policy, the Fed has not only already started raising interest rates and reducing its balance sheet, but it’s communicated that this policy will continue for at least another year. And the US yield curve is flattening and soon possibly inverting, a condition which almost always precedes not only a US economic recession, but also a major market correction.
But today, in US equity markets, nothing negative seems to matter, except one thing—the absolute conviction by investors that stocks will continue to go up, despite all the risks outlined above, and that the only rational thing to do is to continue to own them….and to buy them.
Some day this will change; it always does. But until then, it’s not worth fighting the trend, which is still–clearly–bullish. And when this trend, and market psychology, finally reverses, it’s especially important to remember that almost everyone who’s currently long will get hurt. It will be impossible for the average investor….and even for most pros….to get out before the drop has severely taken away a big chunk of their current paper profits.