Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in the METAVERSE Stocks Universe - 8th Dec 21
Stock Market Sentiment Speaks: I Expect 15-20% Returns For 2022 - 8th Dec 21
US Dollar Still Has the Green Light - 8th Dec 21
Stock Market Topping Process Roadmap - 8th Dec 21
The Lithium Breakthrough That Could Transform The Mining Industry - 8th Dec 21
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

First year of a Stocks bull market, or End of a Bubble?

Stock-Markets / Stock Market 2021 Feb 17, 2021 - 05:41 PM GMT

By: Troy_Bombardia

Stock-Markets

This bull market is unique because unlike past bull markets, this one began with extreme speculation. Historically, extreme speculation occurred at the end of multi-year bull markets. This is why the markets are currently exhibiting extremely bullish signs (e.g. breadth today is similar to what you see at the start of multi-year bull markets) and extremely bearish signs (e.g. speculation today is similar to what you see at the end of multi-year bull markets). How do we reconcile these two opposites?

Let’s take a look at some bullish & bearish factors:

Subsiding volatility

VIX closed below 20 for the first time in almost a year. The past year was a nervous one for markets: stocks rallied, but investors and traders were consistently on edge.


Historical cases of elevated but subsiding volatility led to more gains for stocks over the next 6-12 months:

  1. July 1999: the dot-com bubble lasted for another 9 months.
  2. May 2003: stocks rallied significantly over the next 9 months:
  3. December 2009: stocks rallied over the next year, but there was a significant correction along the way

Fund flows

The recent VIX spike saw record inflows into the leveraged VIX ETF (UVXY).

Such strong inflows typically occurred after a VIX spike. Since VIX spikes when stocks fall, the S&P usually rallied higher over the next 3 months:

Bonds

Rising interest rates are pushing bond prices down. The Treasury Bond ETF TLT’s 9 week RSI is extremely low:

TLT could fall a little further over the next few months, but historically this was bullish over the next 9-12 months:

TLT’s historical data is limited. The Bloomberg Barclays U.S. Treasury Bond Index has more historical data. Once again, this was bullish for Treasury bonds:

Correlation

Plenty of traders have compared the S&P 500 over the past year to 1999, 2009, 1987, or (insert random year here). From a statistical point of view, the S&P 500 over the past year is most correlated to these other 1 year periods in history:

These historical cases saw a slightly greater than average chance of the S&P pushing higher over the next 2 months:

Falling economic uncertainty

As I noted on Tuesday, economic & policy uncertainty in the U.S. is decreasing:

The Uncertainty Index has dropped below 100 for the first time in almost a year. Historically, long periods of high (but easing) uncertainty led to more gains for stocks:

Rampant trading & speculation

Now that we’ve covered the bullish signs, let’s look at the bearish signs. It’s not hard to see signs of extreme risk taking.

U.S. equity volume has surged to its March 2020 highs. The only difference? Volume surged in March 2020 as stocks crashed (which is normal). Volume is surging today as stocks rally. Typically, volume goes up in a crash and volume goes down in a rally.

This volume is flowing into highly speculative names:

So while traders and small speculators bet on more gains, corporate insiders are using this once-in-a-decade opportunity to cash out:

Conclusion: market outlook

How do we reconcile the disparity between these two opposing forces? (extremely bullish momentum vs. extremely bearish excess)

There’s no black-and-white answer. Instead of relying on a definitive answer, my approach is diversify my portfolio into 3 strategies. Diversification reduces volatility in one’s aggregate portfolio.

  1. Long term portfolios should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but stocks are a poor investment on a 3-5 year time frame. There are better opportunities in other markets (e.g. private markets).
  2. Medium term portfolios should go neither long nor short since risk:reward favors neither side. Extreme speculation can always become more extreme, but the risks are also staggering.
  3. Short term trend-focused portfolios should continue to ride the bull trend because no one knows exactly when it will end.

By Troy Bombardia

https://www.bullmarkets.co

Copyright 2021 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in