During bull markets I always get asked about when it’s going to stop. I don’t get asked about stock market bubbles and unsustainable valuations during bear markets, that’s for sure. Those environments come with other kinds of funny questions.
This morning I woke up to one of my college buddies telling me that tech valuations are too high and that this has to be a bubble.
Journalists ask me every day how this can possibly continue. “Too high”, they say. “Too fast”, they tell me. “Fed Printing”, they claim. “It’s only 5 stocks!!!”… I can’t.
Anyway, maybe this is the top. Maybe we are about to crash. Maybe valuations are too high….
But there’s no evidence at all that this is the top. New All-time highs are not characteristic of downtrends. They are things we see regularly in uptrends. In fact, new highs are perfectly normal, and should even be expected in this type of environment.
The opinions of my college friends don’t matter. The opinion of the bond market? Yes, that matters. Currencies? Yup. Metals? Yea probably.
We already covered last week that credit continues to point to higher stock prices. It has nothing to do with a virus or vaccines. It’s only been about credit since this rally started 9 months ago. Don’t get it twisted.
Anyway, to continue with that conversation, I wanted to point out a few other places where we will definitely see signs of a stock market top, if/when it comes. Here is that chart:
Ok so let’s talk about what’s going on here.
Up top we’re looking at a ratio of US Treasury Bonds vs the S&P500. If stocks are under pressure, you’re likely to see money flowing into the safety of the US Treasury Bond market. That hasn’t started yet as we keep making new lows.
Next is Consumer Staples relative to the S&P500. When stocks are doing well, Staples tend to underperform. When stocks are under pressure, you’ll see relative outperformance from Consumer Staples. That hasn’t started yet as we keep making new lows.
We’ll continue with Gold vs the S&P500. As you can see, Gold broke out to new highs relative to stocks on February 21st. If stocks are under pressure, Gold may sell off too, but it is likely to hold up much better. That hasn’t started yet as gold keeps making new relative lows. In fact, the Gold Fund $GLD has never been worth less relative to the Nasdaq100 $QQQ. So we’ve yet to see a flight into precious metals. It’s the base metals that are doing well, not gold.
And finally we’re looking at the Aussie/Yen cross inverted. So the last one at the bottom is $JPY/AUD, that you can see spiked with the others in February and March and then has been making lower lows and lower highs ever since. We’re still not seeing any flight to safety here either.
You have the right to think valuations are too high. You can call the market anything you want. Call it a bubble. Call it unsustainable. Call it Aunt Jemima for all I care.
But we’re getting more stocks making new highs, not fewer ones. We’re seeing more sectors and industry groups participating to the upside. We’re not see more of them participating to the downside. More countries are breaking out to new highs, not fewer countries. Breadths thrusts are adding up, which historically come near the beginning of uptrends, not near the end of them.
And the flight to safety trades I pointed to above, where money flows to the fastest when stocks are under pressure? What are they doing? They all keep making new lows.
So you tell me. Should we be spending our time looking for stocks to sell? Or should we continue to spend our time looking for stocks to buy?
Who are you going to listen to? My college buddies? Or the market?
My bet is on the latter.