Are We At The Euphoria Stage?
Despite the potential for volatility on Thursday, the stock market hovered near its all-time high. The VIX once again stayed at the 10 handle. The chart below takes the excitement seen in the low VIX, high forward PE multiples, and bullish sentiment and combines them to create the Euphoriameter. It’s currently at the fourth highest point since 1988. The peak in the late 1990s and 2014 coincided with corrections in the stock market, but the peak in 2005 was a false flag. The crash caused by the financial crisis was more about speculation in real estate than speculation in the stock market. This is why the euphoria in 2007 wasn’t that high.
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As you can see from chart below, the AAII survey and the ICI Funds implied asset allocations show that cash levels are historically low. With the innovation of Robinhood providing free stock trading and apps like Acorn which help you invest your spare change into the stock market, every last penny everyday Americans have is going towards the stock market. You can see the money pouring in by looking at the ETF purchases. I’m not denying the innovation of these new apps, but the premise that it’s always a good time to buy stocks is flawed. It’s especially not a good time to buy when everyone is getting in. The AAII survey has only shown more cash twice in the late 1990s and in 2014, while the ICI Funds indicator is showing record low cash levels.
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Looking at the lack of volatility in a different way, the chart below shows the duration of trading ranges which are 3.2% from the top of the range to the bottom. Since 1928, there have been 2 periods where this range has lasted 70-79 days and current streak is one of them. There’s only one streak which was 80-89 days. I wish we had stats on the VIX which went back to the 1920s because the current market is just like the late 1920s and the late 1990s in term of excitement. Investing isn’t supposed to be like going to a theme park. Often the most boring stocks provide great returns. Tesla’s cult-like following is a great example of this. The investors of Tesla are buying it for fun. The annual meeting was like a show. Usually when management attempts to allure you with a show, they’re trying to distract you from something. In Tesla’s case, the investors in the cult stock are being distracted from the losses. At some point, the stock will fall to its intrinsic value which will be painful for all investors.
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Alt-Coins Roar Higher
Speaking of excess speculation, the alt-coin market is receiving billions of investments. An alt-coin is a digital currency which uses the blockchain in a different way than bitcoin. They are alternative coins to bitcoin. There’s no way to value cryptocurrencies because they don’t have cashflows you can measure like stocks do. The way I measure bitcoin’s price is the number of transactions, but that’s an incomplete measure because many of the transactions are made up of purchases by speculators. The chart below shows the amazing returns the altcoins have had. The crazy part is this chart which depicts Q1 price increases isn’t close to where the cryptocurrencies are trading now. Ethereum is now at $252.71, so it’s up over 5-fold since Q1. Whenever an asset increases in value very fast it encourages speculators to follow the momentum and push it higher. This golden age of altcoins won’t be permanent. It could end in a crash. I’ve advised diversifying by buying a few altcoins in the past, but there’s no reason to get involved with froth reaching levels similar to the 1990s tech bubble.
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Rebound In Earnings
The chart below provides the reason why the stock market is in a speculative mood. It shows the percentage of S&P 500 firms with negative earnings. After bottoming in 2014, it appeared the S&P 500 was ready to crash like it did in the early 2000s and 2008 because the number of firms with negative earnings expanded. However, that was a false alarm as this year will undoubtedly have fewer firms with negative earnings. The entire energy sector had negative earnings. This is what brought this indicator higher. Those who were arguing in favor of a crash made the legitimate point that there’s always a sector that leads the economy lower. With energy, it wasn’t large enough to bring the economy down and it was a temporary downturn as oil quickly rebounded in 2016. To borrow a phrase from Kelly Clarkson, what didn’t kill this market made it stronger. The longer the market goes without a sharp correction, the more mom and pop investors are willing to risk their retirement savings in the market. Investors should make decisions based on valuations and not recent performance. We know that investors often ignore valuations because that’s how every bubble has been created.
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Gallup Economic Polls
The Gallup job creation index fell from 38 to 35 this week. The peak for the cycle was 2-weeks ago at 39. It’s interesting to see how high the index was in May given the terrible labor report. I think that the BLS May report will be revised higher next month. However, even if it’s revised higher, it’s tough to make up for the large decline in the labor force. The Gallup poll makes more sense as it’s more consistent than the BLS report. I would be concerned if the Gallup poll fell below 30. That being said, this isn’t my go to report, so it doesn’t weigh heavily in my analysis of the labor market. There was a double top in the economic confidence index at 19 in January and March. That report is consistent with my prediction that the expectations would drop after Trump didn’t get any fiscal reforms passed in his first few weeks in office. So far, this negativity hasn’t trickled down to the consumer confidence reports which remain elevated.
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