#863 November 8, 2017

Since March of 2009, the S&P 500 Index has gone up nearly four times in price. Now it has not always been going up since 2009, sometimes it has moved sideways. And this year, it’s only up about 15% but it doesn’t seem to go down. Furthermore, as of the October close, the S&P 500 has had 12 straight months of positive returns. My understanding is this hasn’t happened since 1935. For some time now in my monthly Market Update articles, I have noted that we often have 15 – 30 days out of 100 when the S&P 500 makes a new all-time high.

Why? First, investors are not happy about and are not involved in the market. I don’t hear waiters talking about how much money they made in the market like I heard in 1999. I don’t see 40 bookcases full of trading and investing books at Barnes & Noble bookstores… in fact, to the contrary, there are hardly any trading books out there now. What I have seen and continue to see instead is everyone being concerned about when and how this bull market will come to an end (see the figures below). To me that’s hilarious.

You should trade/invest based upon what the market is doing right now…You should not trade/invest based upon what you think the market might do one day in the future. So many people miss out on the best opportunities because they base their trading/investing upon what they think the market will do rather than what the market is doing. As I’ve been saying for years, you only trade your beliefs about the market. Beliefs grounded in what the market is doing are much more useful than beliefs grounded in “fear” or “greed” and beliefs about what might happen in the future.

We have had a bull quiet market for a long time now and that’s absolutely the easiest market type of all to invest in — bar none. It’s the one market where you can actually buy and hold (or my preference, hold using a 25% trailing stop).

When a market is up 400% we usually see euphoria. But as I said, these days I don’t hear waiters telling me they are traders and are just waiting tables on the side to earn a little extra money. Instead, I hear comments like the VIX is too low. That’s absolutely where you want it to be. The market type remains pretty safely in bull mode while the volatility remains low.

I read other comments like valuations are too high, the Federal Reserve is tightening, the market has been going up for too long, and we are due for a correction. Of course, I also hear that the world is falling apart — we have an idiot for a president, Trump will be impeached, and we could have a nuclear war soon. Most people are still focused on what will bring the market crashing down and they expect that to happen soon. While everyone feels that way, it will just keep going up.

High tech stocks are soaring. Apple now has a massive market capitalization of $872 billion. Look at the stock prices for companies investing heavily in artificial intelligence (Amazon, Apple, Google, IBM, Nvidia) which is one of the areas of the future. They are all going up nicely. Contrast that with the “very hot” though highly volatile cryptocurrency market which has a total market capitalization of about $200 billion.

According the New York Times, cash holdings by institutional investors and high net worth people are at record low levels. That’s not a sign, however, that the market will fall now. Meanwhile, many pension funds continue to avoid the stock market and instead, they are putting their funds into private equity investments. Private equity investments lock up money for a long period of time (often 10 years or more) and incur large fees.

The new fiduciary rules are scaring small-time operators out of managing pension funds — which puts pension fund money mostly in the lap of the big financial services companies. Brokerages have become concerned about their potential liability for pension fund management. For example, several years ago I was informed that my 401k plan retirement account no longer had any margin. As a result of trading restrictions like that, I turned all of my employee’s pension money over to a large company to manage (I still trade my own account). These are not the kinds of things that happen when everyone is euphoric and the market is in danger of falling. These are more the sort of things that happen in bear markets and tend to signal the end of the bear.

My old friend, Steve Sjuggerud, has been strongly bullish about the market since 2009. In the last year or two, he has been saying that he expects the stock market to “melt-up” which means he expects the gains will start to accelerate. I’m not sure about that but it could happen and I’ll continue to monitor the market type. Regardless, it’s certainly a good time to be fully invested. Quiet bull markets make everyone look like a market genius — if they participate.

I’m not going to be concerned about this bull market coming close to an end until I start hearing waiters tell me they are actually traders and our technical workshops have waiting lists to attend. (We had a record 71 attendees at a stock trading workshop in March, 1999.) These type of events signal the beginning of the end for a bull market so I will begin to take notice but I still won’t worry that a major drop will be about to happen in the market. I will warn people to start monitoring the market and to start preparations for going short — but we aren’t even close to anything like that now.

In fact, during that September 13, 2017 article here in the Tharp’s Thoughts newsletter, I gave you two items that I keep a close eye on as my “canaries in a coal mine” — my early warning system that market momentum could be changing. Those two early warning signs are the market breadth and the global market strength.

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