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With no material change to our investment outlook, I’ll keep this comment brief. On the basis of the most reliable valuation measures we identify (those most tightly correlated with actual subsequent 10-12 year S&P 500 total returns), current market valuations stand about 140-165% above historical norms. No market cycle in history, even those prior to the mid-1960s when interest rates were similarly low, has failed bring valuations within 25% of these norms, or lower, over the completion of the market cycle. On a 12-year horizon, we project likely S&P 500 nominal total returns averaging close to zero, with the likelihood of an interim market loss on the order of 50-60% over the completion of the current cycle.

As I’ve observed for decades, even a richly overvalued market can move higher, providedthat investors remain inclined to speculate, which we infer from the uniformity of market action across a broad range of market internals (when investors are inclined to speculate, they tend to be indiscriminate about it). In prior market cycles across history, however, even favorable market internals were overruled once extreme “overvalued, overbought, overbullish” syndromes emerged. The half-cycle since 2009 was different. In the face of zero interest rates, yield-seeking speculation persisted even after those extreme syndromes emerged. The best indication of that speculative mindset is that market internals remained uniformly favorable during most of the period prior to mid-2014. Importantly, even since 2009, the S&P 500 has lost ground, on average, in periods when extreme overvalued, overbought, overbullish syndromes were accompanied by deteriorating market internals. That’s the situation we observe at present.

Put simply, with market internals unfavorable and interest rates off the zero bound, the two main supports that made the half-cycle since 2009 “different” have already been kicked away. From here, we expect the dynamics of this market cycle to resemble other periods when offensive valuations and extreme overvalued, overbought, overbullish syndromes were joined by deteriorating market internals (particularly when interest rates were off their lows). Short term market outcomes are anybody’s guess, but across history, that overall combination has typically defined crash dynamics.

Notably, we’ve observed a widening of internal dispersion in recent weeks. For example, weekly NYSE new lows have averaged about 4% of traded issues recently, with nearly 6% last week, even with the S&P 500 near record highs. Meanwhile, nearly 40% of stocks are already below their 200-day averages. I’ve noted before that raw “Hindenburg Omens” (days when both NYSE new highs and new lows exceed about 2.5% of traded issues) are typically not ominous at all. The exception is where they are accompanied by a broader syndrome of tepid market breadth even with the major indices still elevated, when multiple signals appear in close succession, and when market internals are unfavorable on our own measures. On that note, we’ve observed 4 such daily signals in recent weeks, with two last week alone. We saw similar widening of internal dispersion in December 1999, July and November 2007, and July-August 2015. Still there are a few signals such as 2006 and 2013 that were followed by only minor hiccups. That improves the average outcome, though the average is still negative overall.

Overall, our current market outlook remains strongly negative, but we would be inclined to adopt a more neutral outlook if our measures of market internals were to improve. As I’ve often observed, the most favorable market return/risk profile we identify typically emerges when a material retreat in valuations is joined by an early improvement in market action. Whether that occurs after a moderate correction, or after a market collapse, that’s the combination most likely to move us to a constructive or aggressive outlook, depending on the status of valuations and other conditions at that point. The most extreme overextended syndromes we identify are now accompanied by deteriorating market internals and interest rates that are well off the zero bound. My impression is that without a shift back to uniformly favorable market internals, the continued faith in monetary support may prove to be the same awful bet it was during the 2000-2002 and 2007-2009 collapses, both which were accompanied by aggressive monetary easing all the way down.

We’ll take our evidence as it arrives.

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From Whitney Tilson:

1) It’s a sure sign of a top when I’m getting random emails like this:


Hello, This is [name], I am a college student that started a trading account two years ago. Over the past two years I have generated over 30% each year in stagnant market conditions.  I have given rise to a trading strategy that is low in risk, nevertheless unique in nature with a worldly view on financial markets and the efficient market theory.

At the beginning of 2016 I started off  buying and selling oil futures. Over time, my trading style has matured. The Use of derivatives and uncorrelated value investments, technical markers with event driven placement is the literary overview of on world market hypothesis.

The current global market pricing theories see the world as a bunch of moving parts that make up one whole, my current trading strategy sees the world as one whole with an assemblage of moving parts. a wise man can tell the difference.

I am in the process of registering with that state of Rhode Island and FINRA to get started with a multi strategy hedge fund. I was wondering if you and your are open to me asking questions about the overall hedge fund playing field and gaining trust from investors.


Thank You,




2) Along these lines, a friend sent me this:


With companies such as Amazon, Netflix, Nvidia, Tesla, Google and Facebook trading at all-time highs — and I am not in any way suggesting that all of these companies are “the same” in terms of fundamentals or valuation — I am reminded of two conversations I had in February, year 2000.


The first conversation was in Boston.  I was marketing with the big institutional accounts for a day, and riding around between these meetings in a cab.  I was covering Internet high-fliers at the time, although not the large-caps.  I was covering the recent IPOs, the $300 million to $1 billion, mostly, companies, which seems like nothing these days, but was a real business back then.


The salesperson — I think I remember who it was — told me: “I know it’s been easy this last year. You’re a star. Everyone thinks you’re a genius. All of these stocks are up 100%-400% in barely a year. It won’t last. If nothing else changes, you will be swiftly forgotten once these companies crash. They way you’ll be remembered is if you come even remotely close to calling the top, telling everyone to sell. Will you do this?”


I said no.


I think it was the week after this, on a business trip to Silicon Valley, that I was having dinner with a long-time elderly friend in San Francisco — a legendary private investor whom I had gotten to know a decade prior thanks to an almost random circumstance.  He was one of the most fascinating people I have ever met.


We were having dinner at The Big Four on Nob Hill and he told me: “My friend, sell everything now. These valuations are insane. I’ve been in the business since the 1950s and I’ve never seen anything like it. There are simply not enough profits to support these prices. Maybe it can last a little bit longer, but it’s months — not years — away. These high-fliers will crash. Mark my words.”


In 2000, I had my investable portfolio almost exclusively in those small-ish high-fliers.  In the 12 or so months that followed these two conversations, I lost at least in the ballpark of 85%, if memory serves me right.  The crash started in March 2000 and by December 2000 it was as dark as it gets.  $40 stocks were trading at $2 in many cases.  My account was down to almost zero.  It was so bad so fast, that 2001 actually wasn’t a bad year at all.  The band-aid came off faster than I could blink.


History will not repeat itself precisely in every detail.  A lot of things are different, including market belief regarding central bank intervention.  We have been building up inflationary pressures since at least the 1990s.  Actually, 1971.  Actually, World War 2.  Actually… 1913.  You get the point — the pressure has been building for a century now, at least four full investing generations.


All that said, I think that we are on the cusp of having to go closer to market neutral by putting on some hedges, even if not selling (some of) these kinds of stocks outright.  The question is which ones.  Some of these companies are now very profitable, very cash-flow positive, businesses that — while not cheap or even market-average — aren’t trading in bubble territory.  Some of these companies could do reasonably well, and if you have huge gains, may not be worth selling in order to prevent a 25%-40% decline.  Better to hedge these things with some other instrument.


It’s pretty obvious to me that the biggest bubble in the market is Tesla.  Why?  Because it’s the company with positively the weakest fundamentals.  It’s almost comically bad.  Margins, competition, sales trajectory, capital requirements — any one of these individually would be reason to short it.  This company would be bankrupt within approximately a year or two at the most, if it couldn’t access the capital markets anymore.  Any meaningful decline in government subsidies could in turn trigger this, even aside from all the other market and technology-based variables.


It’s even more obvious when you talk to the bulls in the stock — from institutional investors to smaller players.  Very few have read the quarterly SEC filings or are even proficient in financial statement analysis.  Almost none have done comparative work on the other automakers, which may be Tesla’s biggest advantage with its investor base (“Look at all these robots! An assembly line! Unique!”).


However, we all know Tesla is up because of something else.  This is a sexy product — a car — not some dorky behind-the-scenes cloud product.  Buying the stock may even become a political statement for some.  Last December, it became a Trump stock, and so the stock went up. Then, it became an anti-Trump stock, and — you guessed it — the stock went up because of that too.  It’s all totally irrational, but nevertheless real.  It could go parabolic before it goes to zero, which it will barring a miracle.


It’s been an insanely good 1-2 years — in some cases more — in these stocks.  My mind is now focused on figuring out a way to lock in these gains, perhaps without selling the stocks outright.  Maybe the answer is to simply short Tesla and ride out what could still be a painful 9-18 months?  That’s the big question.


In the end, the history books will probably read: “Despite having seen the movie before, and having a rational argument to the contrary, he waited too long. Could have cashed in and retired, but chose the curtain and rolled the bullish dice one time too many. Rest in peace.”


3) Here’s a well-articulated case that the market has a lot more room to run, Bubble Watch, The Brooklyn Investor, Excerpt:


Trailing P/E
Let’s put the CAPE aside for now and just look at regular trailing P/E’s. Back in 1999, that went up to 30x, and in 1987, it went up to 21.4x  (this is from the Shiller spreadsheet).

We keep hearing from the bears that the market is as expensive as it was during previous peaks, so we are in dangerous territory; they say we are in a bubble.

OK. That is possible.

But in previous posts, I argued that if 10 year rates stabilize at 4% over time (it’s at 2.3% now), it is possible that the market P/E can average 25x during that period. Maybe the market fluctuates around that average, so the market can easily trade between 18x and 33x P/E without anything being out of whack. (Buffett also said at the recent annual meeting that if rates stay around this area, then the stock market could prove to be very undervalued at current levels.)

So we have a problem. This 18-33x P/E range puts the market in bubble territory according to the bubble experts. But we are saying here that if rates stay at 4%, that’s the normal range the market should trade at.

So then, how can we tell when we are in bubble territory?

Since we are using interest rates to value the stock market, we will have to interest rate adjust our bubble levels too.


4) In light of Amazon’s deal to buy Whole Foods (and the role of activist Jana Partners), I think this in-depth article is particularly interesting: The Shelf Life of John Mackey, Excerpt:

This is the conundrum that has dogged Whole Foods for much of the past ten years. It continued to grow handsomely as it added more stores and ever more in-house dining areas and special services, but eventually the competition caught up to it. “They didn’t evolve,” says Phil Lempert, a longtime food-industry analyst and the editor of “I think the chain really had blinders on and thought they were so far ahead of everyone else that they didn’t have to pay attention to competitors. The reality is, I can go to Kroger and buy the same or similar goods at a lower price—it’s that simple.”

The situation also provides an excellent window into the mind of Mackey. A conventional solution might be to double down on growing Whole Foods into a mega-grocer. To Mackey, though, it’s a callback to his roots. “We’re going back to being a little bit more niche than we were. We are not going to be the supermarket that everybody’s going to want to shop at.”

Fair enough, but the problem with that strategy is that it’s probably not the kind of thing that’s going to satisfy Wall Street investors, who demand never-ending growth, measured in quick-fire increments every three months when the company reports its quarterly earnings. For a publicly traded company, the reality is that the market demands that you either grow or die.


5) Speaking of activism… When Activists Enter the Kitchen, the CFOs Feel the Heat, Excerpt:


Investors cheered last month when Whole Foods Market Inc. named a chairwoman and five independent directors. After losing more than 40% since late 2013, shares rose 2.2%.


Charles Kantor was less impressed with a different change. The portfolio manager at Neuberger Berman Group LLC, was concerned that the finance chief the company named the same day, Keith Manbeck, lacked experience, as the company is being targeted by activist investor Jana Partners LLC. Neuberger Berman owned a  2.7% stake in the upscale grocery chain as of March 31, according to FactSet.


6) An in-depth look in the NYT Magazine at one of the leading short activists, Andrew Left. The Bounty Hunter of Wall Street, Excerpt:


Short-sellers of Left’s generation are following this example but cutting out the middleman. You don’t need an office in a flashy building in the Battery, they have realized, or the validation of the press. If you build enough of a reputation, all you need are some Twitter followers and a website. Left has emerged at the forefront of this new guard. Unlike Chanos, who managed billions of dollars of other people’s money, Left invests his own, which exempts him from disclosing his holdings to the public. And now that his work has brought him national attention, he has found that others are willing to make it easier, by leaking documents to him and passing tips. In many cases, Left’s dossiers against his targets are not wholly his own but built using information from a confidential source. He is, in this sense, a bit like a journalist.

He also makes it look easy. One result of Left’s fame is that today’s younger traders believe that they, too, could be him. Wuyang Zhao, a professor at the University of Texas, Austin, who wrote his dissertation on activist short-selling, told me: “People read Andrew Left, and they’re like: ‘Oh, my God, it’s not impossibly difficult. It’s not a lot of work, and you can bring down a big company.’?” One of Left’s friends recalled a visit Left made to a university to give a lecture. In the hallways afterward, the students swarmed him. “It was like he was Mick Jagger,” the friend said.

7) A creative new form of shareholder activism!

Shareholders in a zoo near Shanghai, frustrated that they weren’t making a profit on their investment, fed a live donkey to zoo tigers as a form of protest.

Video of the scene shows the donkey pushed down a makeshift ramp into the water surrounding the tiger habitat, where it is promptly pounced upon. Tigers bite and claw the donkey as it bleeds and struggles in the water. The footage has prompted protest and outrage in China.

In a statement, shareholders who invested in Yancheng Safari Park say they held a meeting and voted in favor of feeding the live donkey to the tigers to express their frustration.

Their objections center on the zoo’s debts and legal troubles, which resulted in a court freezing the zoo’s assets. For two years, the shareholders said, they have seen no profits from the zoo. They argue that the court’s decision was unfair, and that the trial is moving too slowly.

“Shareholders are very unhappy about this,” the group of investors said in the statement. “So in a rage, a live donkey and sheep will be fed to the tigers.”

The Guardian reports that zoo officials did not intervene in time to save the donkey, but managed to prevent the shareholders from sending the sheep into the tiger enclosure.

8) Interesting: Why Is Trump Causing Chaos In Washington But Not In The Stock Market?, Excerpt:

Time and again in recent months, supposed experts (including me) have suggested that turmoil and uncertainty in Washington — the Russia investigation, the travel ban, the on-again off-again health care bill — was on the verge of bringing the long stock-market rally to an end. Time and again, the markets have proved doubters wrong. (The latest grim example came Wednesday, when House Majority Whip Steve Scalise and several congressional aides were wounded by a gunman in Virginia. Stocks barely budged.)

Investors’ apparent indifference to the tumultuous start to Trump’s presidency has left some experts shaking their heads. After all, we are constantly told that markets hate uncertainty. And Trump’s first months in office have brought plenty of uncertainty: He hasn’t released specific proposals for much of his domestic agenda; he has appeared to question core elements of American foreign policy, including the U.S. commitment to NATO; and the ongoing Russia investigation has led even some Republican members of Congress to discuss the possibility of impeachment.

“Washington and Wall Street cannot both be right,” Financial Times columnist Edward Luce wrote last week. “Washington and the world are in a state of fear. On the other, Wall Street sees only blue skies ahead.”

So why aren’t investors more fearful? It’s hard to know for sure — interpreting market behavior is usually a sucker’s game. But it’s possible to lay out a few, not mutually exclusive, theories:

9) Another reasonably balanced take on Trump’s impact on the economy, How Trump’s Chaotic Presidency Threatens the Economy, Excerpt:

Sure, you might think: Donald Trump isn’t exactly a competent president. But it’s a long-standing truism of U.S. politics that, at the end of the day, presidents really don’t have immediate and severe effects, for better or worse, on economic performance or jobs. Instead, what really matters are larger-scale forces — say, the growth or stall of productivity, something that politicians have very little effect on in the short term. We can all play games with economic statistics and where presidencies begin and end, but most of the claims involved are partisan fictions.

But that truism was never tested by Donald Trump.

Few seem to have adequately priced in the possibility of large, unusual downside risks from having Trump in the White House. I’m not talking about normal policy differences, such as Trump’s withdrawal from the Paris climate deal, in which some will argue (just in terms of economic development) that he’s freeing U.S. businesses while others will maintain that focusing on coal mining while the future is in renewables is a poor trade-off. I’m focused here on the possibility that his chaotic presidency could produce devastating results just because normal governing might prove impossible.

Here are the five biggest scenarios I’m aware of, and how the chances of each have changed since Trump won the presidency in November.

10) This is very unfortunate – and ironic, given that the Americans who will most be hurt by a neutered CFPB will be Trump’s core voters! Trump Administration to Call for Curbs on Consumer-Finance Regulator, Excerpt:

The Trump administration will recommend limits on the U.S. consumer-finance regulator and a reassessment of a broad range of banking rules in a report to be released as early as Monday, according to people familiar with the matter.

…It is harshly critical of the Consumer Financial Protection Bureau and recommends that the bureau be stripped of its authority to examine financial institutions, people familiar with the matter said. By law, the bureau has the authority to enforce consumer laws as well as to examine individual firms on a continuing basis.

11) Speaking of Trump, never let it be said that I can’t say anything nice about him. It’s been nearly five long months, but that day has finally arrived. This is tremendous news! (That said, Trump’s noxious, xenophobic policies toward immigrants still places Dreamers’ families in tremendous jeopardy.) Trump Will Allow ‘Dreamers’ to Stay in U.S., Reversing Campaign Promise, Excerpt:

Immigration rights activists, who have fiercely battled Mr. Trump’s travel ban and increased enforcement of other immigration laws, hailed the decision.

“This is a big victory for Dreamers amid months of draconian and meanspirited immigration enforcement policy,” said David Leopold, an immigration lawyer. “The preservation of DACA is a tribute to the strength of the Dreamer movement and an acknowledgment — at least in part — by the Department of Homeland Security that it should not be targeting undocumented immigrants who have strong ties to their communities and have abided by the law.”

12) A great piece of investigative journalism on how FINRA is failing to rein in the worst bucket shops/boiler rooms. What a total disgrace! Wall Street’s self-regulator blocks public scrutiny of firms with tainted brokers, Excerpt:


In three years of managing investments for North Dakota farmer Richard Haus, Long Island stock broker Mike McMahon and his colleagues charged their client $267,567 in fees and interest – while losing him $261,441 on the trades, Haus said.

McMahon and others at National Securities Corporation, for instance, bought or sold between 200 and 900 shares of Apple stock for Haus nine times in about a year – racking up $27,000 in fees, according to a 2015 complaint Haus filed with the Financial Industry Regulatory Authority (FINRA).

Haus alerted the regulator to what he called improper “churning” of his account to harvest excessive fees. But the allegation could hardly have come as a surprise to FINRA, the industry’s self-regulating body, which is charged by Congress with protecting investors from unscrupulous brokers.


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Yesterday we got a look under the hood of the portfolios of the biggest money managers in the world, via their 13F filings (required quarterly portfolio disclosures to the SEC). It has been clear that the biggest and best, embrace this big theme, and have been aggressively positioning to take advantage of the very bullish proposed policy tailwinds for stocks, which are: 1) a corporate tax rate cut, which will go right to the bottom line for profitable companies. Not surprisingly, which stocks have been leading the way in the climb in the indicies? The ones that make a lot of money (Apple, Microsoft, Google). 2) a repatriation tax holiday that will bring back trillions of dollars onshore, to be paid back to shareholders and put to work in the economy through investment and projects. 3) a trillion–dollar infrastructure spend that, regardless of how difficult it may be to legislate, should happen in one form or another.

Among the reports on portfolio holdings yesterday, we heard from the Swiss National Bank. As I said above, don’t forget there are still central banks deeply entrenched in QE and, beyond local government bonds, are buying foreign assets (in large amounts). Switzerland’s central bank has more freshly printed money to put to work every quarter, and has been increasing their allocation to equities dramatically–$80 billion of which is now (as of the end of the first quarter) in U.S. stocks! That’s a 29% bigger stake than they had at the end of 2016. The SNB is the world’s eighth biggest public investor.

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And he expects the indexes to keep hitting all-time highs. In fact, he looks for the S&P to reach 2650, more than a 10% gain from current levels.

But that’s where he thinks this long, unloved, but very profitable bull market will end, probably in the first half of 2018. We are entering the bull’s final, euphoric stage, he told me in a telephone interview from Montreal, where he has published his technically oriented newsletter, Phases & Cycles, for 27 years.

His analysis is based on Elliott Wave theory, which holds that markets move in “waves” — five in bull markets, three in bears.

Robert Prechter, president of Elliot Wave International, has gained notoriety for his deeply bearish — and profoundly incorrect — predictions over the last few years. But Meisels says Elliott Wave theory explains the twists and turns of this bull market very well. The chart below, which he supplied to MarketWatch, traces its history.

Ron Meisels
This chart by Ron Meisels indicates that stocks could be in the final wave of the bull market.

It began with what he calls “a major, major economic and market low” on March 9, 2009, when the S&P reached a closing low of 676.53 and the Dow hit bottom at 6547.05.

From there, the S&P nearly doubled in wave one, but then, starting in 2011, went through a major correction (the S&P lost 19.4% of its value) Meisels said was typical of wave two.

The double bottom in 2011 coincided with the end of the debt crisis in Congress, and from there the markets rallied again in wave three, which, Meisels explained, lasted until mid-2015. The bearish wave four culminated in February 2016’s lows in stocks and oil.

“If you think back to January, February 2016, a lot of newspaper writers, the market writers and commentators thought this was the beginning of a bear market,” he told me. But the market had a big surprise in store for them (or, actually, us): It started a new up leg — wave five on Meisels’ chart — that has taken the S&P from around 1800 to north of 2400.

“Leg five is definitely the last up leg of the bull market, it eventually leads to euphoria and when the taxi drivers stop to give you stock tips,” he told me.

“I don’t find that the market is at that stage yet,” he continued. “Definitely we are more frothy than we were in 2009 and 2010.”

And far more complacent. On Monday, the CBOE volatility index, or VIXVIX, +1.86%  , dubbed Wall Street’s fear gauge, closed at 9.77, its lowest level since December 1993. Also, since the election, as this column reported, conservatives and Republicans, who stayed away during the Obama administration and while the Federal Reserve was “manipulating” markets, have jumped back into stocks with both feet now that their man and party are back in charge.

Meisels, who is Canadian, studiously avoided discussing American politics. But he observed, “Maybe not just because of Trump, not just because of Democrats and Republicans, I think that people after seven years seeing the market keep going up …finally people start throwing in the towel and that leads to the euphoria you and I were talking about.”

In other words, the new administration has become a political rationale for the classic capitulation of the bears that occurs at the end of every bull market. Meisels expects to see true euphoria kick in by this fall or early next year.

“I wouldn’t be surprised … if the market slows down between now and late August, you could have a minor correction, but… I would expect the market to have another leg up starting in September, October,” he told me. “The end of leg five and the end of this whole bull market cycle … I believe most likely would be in the spring of 2018, the first half of 2018.”

No guru’s words are gospel, but Meisels does have a good track record, and his argument makes sense. Risk is rising even as complacency reigns supreme, and that’s a recipe for trouble. I wouldn’t sell everything now, but I would start gradually reducing my stock holdings on rallies.

And the true believers piling into the market after eight years’ absence are about to learn their lesson the hard way.

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The market call I am making could be life changing. The explosive Bull Market from 1995-2000 helped so many investors multiply their accounts many times over and we could be heading into a similar period now. The problem is most money managers are not prepared for it and the majority of investors are scared. If I am right about this call, you will need the ability to trade growth stocks and take advantage of a strong market. If you’re looking for someone with extensive experience in these areas, please contact me at:

There is a constant theme in the financial media that this Bull Market is about to end any day now. I believe it still has a long way to go. It’s not going to continue straight up and we’ll experience plenty of corrections along the way. Ultimately, it will end with a “blow off” move to the upside where everyone just throws in the towel. I don’t know if this will happen three months or three years from now, but I am leaning towards the latter because it will take a long time for investors to change their mentality. I’m basing my thesis on technicals, fundamentals and investor sentiment. (I could write 10 pages on each of these topics but I will do my best to focus on the major points).

Technicals – Weekly volume is important to monitor because the big funds control the market. The major indexes continue to show that institutions are accumulating stock. For the most part, they are buying stock on the positive weeks and selling very little on the down weeks. This isn’t limited to the US markets. The global boom is being confirmed by new highs in many international markets. In the US, the leading growth index is the Nasdaq 100 and you can see in the chart below that it JUST broke out in July 2016 after going nowhere for almost 17 years!

Charts provided by MarketSmith

Fundamentals – The Bears’ biggest argument is that the market is overvalued. Stop with this nonsense! If you factor in the low interest rate environment, we’re trading at a reasonable valuation. If you take out Energy, the market is actually cheap! Also, the market is a discounting mechanism and trades on what will happen 6-9 months from now. Within the next two years, the economic stimulus from the new administration will help earnings grow and justify valuations. In addition, many Mega Cap companies have strong balance sheets with $20-$300 Billion in the bank. Not exactly a bubble, but I will get into this later.

Sentiment – Everyone hates this market! Even the Bulls I speak to are nervous and have one foot out the door. This constant fear is helping to drive the market higher, as many people are underestimating the power of psychology in fueling market rallies. For a while, I’ve been writing about this consistent psychological pattern in the market: An event (usually with a finite date) is over-hyped by the financial media. Since everyone is already nervous, there’s a huge rush into put hedging, shorting stocks, and buying toxic VIX products, etc. The event turns out to NOT be the end of the world and the market grinds higher, forcing many to cover their short positions and/or put cash to work.

Think of everything that’s been thrown at this market over the past few years: geopolitical concerns, dramatic elections, viruses, Brexit, terrorist attacks, etc. and guess what? The market has been INCREDIBLY resilient and literally brushes off any bad news. Now, imagine if the news over the next year or two actually turns positive. I realize the media hates Trump and will never say anything positive about him, but imagine if his team actually makes progress in tax reform, health care and the overall economy improves. This could move GDP growth from around 1% to 3% and S&P earnings can increase to $140-$150 over the next two years. Again, no one wants to consider anything positive but remember two things are almost always true: 1) The world keeps getting better and 2) The people always think it’s getting worse.


At the beginning of 1995, if someone said the Dow Jones would climb from 4,000 to almost 12,000 in the next 5 years, no one would believe it. Why? Because the crash of 1987 was still fresh in investor’s minds and the recovery was already 8 years long. Sound familiar? The correlation to today is that the Financial Crisis of 2008-09 is still fresh in people’s minds and the recovery has already lasted 8 years. Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this 8 year recovery is “long in the tooth” and about to end. However, I have made the argument for ten months now that we resumed a NEW Bull Market in July 2016 (that really began in Jan 2013, NOT March 2009). Very few people want to talk about the Bear Market that recently happened from mid 2015 to mid 2016 where the average stock corrected over 20% and many of the leading sectors corrected between 25-50%. A similar thing happened from early 1994 to early 1995 BEFORE the market went on a strong run as shown below:

Here’s the catch: The move higher will not be easy. There will be corrections, shakeouts and pullbacks along the way. Many of them will be sharp and VERY convincing that the Bull Market is over. For example, even during the great bull market of 1995-2000, there were big corrections in 1997 and 1998 during the Asian economic and Russian debt crises. In fact, the correction in Sept/Oct 1999 had many people (including myself) thinking the bull market was over…right BEFORE it recovered and went on one of the most amazing six-month runs in market history! The biggest challenge for investors will be navigating through this. In other words, it will require a good balance of taking profits along the way up and having conviction during the corrections.


For the past 100 years, the market’s pattern has been approximately 15-20 years of an economic boom followed by 10-15 years of a downturn or consolidation. This current cycle looks to have started with the new highs created in 2013 and could last for many years. These cyclical uptrends are usually led by new inventions that revolutionize our lives, enhance productivity, and completely change the way we do things. The new ingredient that could really add fuel to this rally is the global economy. Many companies continue to expand internationally and are seeing explosive growth overseas. We are no longer just a domestic economy as we were in the past. One sector I am specifically focusing on is the Semiconductor group. Chips are no longer just going into computers. They are found in smart phones, cars, watches, memory, sensors, machine learning, artificial intelligence, etc. The “Internet of things” is the inter-networking of all these devices and experts estimate that we will see over 50 billion connected objects by 2020.


If you study the biggest stock winners throughout history, the majority of their moves end with “blow off” or climax tops. This usually involves a period of days or weeks where the stock gets extremely extended in price, sees several technical gaps, and ends with its largest point move of the entire advance. As I mentioned before, many of the Mega Cap growth leaders such as Apple, Amazon, Facebook, Home Depot, Google, Netflix, Salesforce and Priceline have a tremendous amount of cash in the bank. In addition, you rarely see companies with $50-$700B market caps growing at such amazing rates. Combine that with the Large Cap Financial stocks that have strong balance sheets and you have a potential recipe for higher prices. At some point in the next few years, I wouldn’t be surprised to see “blow off” type moves in many of today’s growth leaders.

Another factor to consider is there are fewer stocks to buy. The number of publicly traded stocks has dropped from approximately 7500 in the late 1990’s to under 3800 today. This is the result of more M&A, less IPO’s due to stricter regulations, and a more liquid private market. As money flows into the market, fund managers have fewer stocks to chose from and lower floats to work with because of all the corporate stock buybacks. In other words, less supply and more demand.

There are two final points I would like to make: 1) I am not a blind bull. If I am wrong about this call, I will simply cut losses because capital preservation is ALWAYS the number one priority for my clients. One of my biggest strengths is the ability to make decisions and change my mind when market conditions call for it. 2) If I am right about this call, this could be life changing! You will need someone who can capitalize on this move, especially if your financial advisor is bearish and doesn’t have you positioned properly. If you are looking for a money manager or would like to set up a FREE consultation, please email me. My skills at finding growth stocks and my 20 years of trading experience will allow me to take advantage of this rare, generational investing opportunity.

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Which looks to be headed lower over the next few days at least.

This is the first opportunity I have had to look at the market for about 1 week. I have been busy moving house. This is a very tiring and stressful undertaking. Chaos reigns. At the moment mostly everything is still packed in boxes.

As to the market, overall, it would seem to have lost upside momentum and now will have a period of weakness. Having quickly looked at the various commentary around, much is attributed to Trump etc. Also mooted is the high P/E ratio etc, with market near all time nominal highs.

If already long, stay long and ride out the volatility. If not in the market, this could provide an entry point. I would not be short, unless you can manage the position on a daily basis. I think the ‘shorts’ will have some time to make a bit of money, but if the market turns higher, then it will likely move higher with higher volatility.

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Totally ignoring all of the media stories, fundamentals, anything other than the 3 charts, the charts would suggest that for a long while since 2000, the market has gone essentially nowhere until the current breakout.

The charts would suggest that the breakout has a long way to run yet. In fact, it is just getting started.

I’ve blogged about the eventual breakout previously and recommended hanging on, which I still would advocate, purely on a chart basis.

The important thing is that the ‘news’ around the breakout, as it was historically, is usually bad. There are all manner of problems. Hang on, somehow.



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If you were waiting for a pullback to buy, here it is. Of course now the question is: will it keep pulling-back and get cheaper etc.

That is always the problem buying markets that have already made a run.

Personally, I wouldn’t buy here. Not that I know whether it goes higher/lower, simply that the potential volatility is too much to buy here.

For what it’s worth, I think the market goes higher again. Best guess.

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A Le Pen victory in May, pretty much signals the end of Europe as a European Union.

Is a Le Pen victory possible? I would say definitely yes. The ‘nationalistic’ winds are blowing strongly at the moment, Brexit and Trump being the 2 standout examples.

I’ll probably start to pay a little more attention to this now that Trump has taken power in the US. I also have some definite ideas about where I would want to invest for this coming political cycle.


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The whole problem with the world is that fools and fanatics are always so sure of themselves, and wiser people are full of doubts”

–Bertrand Russell

I always have admired the writings of British philosopher Bertrand Russell, who died in 1970, 14 years before the Russell 2000 Index was created and compiled.

The Russell Index, his “namesake,” now may be priced to perfection.

Nothing moves in a straight line, especially in the markets.

Fade the Trump small-cap rally, as hope seems to be triumphing over experience.

In “Donald Trump, You Are No Ronald Reagan (Part One)” and “Yell and Roar … and Sell Some More,” I struck a cautionary tone about economic and market cycles, political partisanship leading to delays or more modest tax reductions, and the leadership skills and avowed policies of President-elect Trump compared to those of President Reagan. I also compared the current market advance with the honeymoon the markets delivered 35 years ago. (I will be expanding on my thesis and concerns this week).

This morning, in “How Long Will We Ignore the Negatives of This New Presidency, ” Jim “El Capitan” Cramer voices and adds to many of my concerns.

While respecting the strength of the last month’s stunning and almost parabolic move (see Bertrand Russell’s quote above) and recognizing that the only certainty is the lack of certainty, the markets to this observer are overvalued on almost every basis and the reward versus risk is substantially tilted toward the downside.

My pal David Rosenberg, chief economist and strategist with Gluskin Sheff, shares my view that the market is being over optimistic:

“If you were to do a fair-value estimate of the multiple against where it is today, you could actually then back out what the implicit earnings forecast is. And right now, it’s 30%. That is the implicit earnings increase that is priced in. So if you’re buying the equity market today, just know that you’re buying an asset class writ large that is expecting a V-shaped +30% bounce in earnings growth over the course of the coming year. Trouble is, that it is a 1-in-20 event — and normally that 1 in 20 happens early in the cycle, not late in the cycle …. Actually, six quarters of negative comparisons. I mean, if the earnings recession is behind us and if there are Trump tax cuts ahead of us — even if I allow for the full brunt of corporate tax cuts — and if I allow for whatever nominal GDP growth is going to be, I still can’t get earnings growth much above 10%. 15% is a stretch, but you might still get there. But even that doesn’t get you to a 30% earnings expectation.”

–Welling on Wall Street: An Interview with David Rosenberg

So, what is the best short? Perhaps it’s the Russell Index.

“When all the forecasters and experts agree, something else is going to happen.”

–Bob Farrell’s Rule #9

In keeping with my negative market outlook for 2017, I am making Direxion Daily Small-Cap Bear 3x ETF (TZA) , at $18.78, my Trade of the Week. Here’s why:

* Over the last year the Russell Index has materially outperformed the broader indices: Since mid-December 2015, the Russell Index has doubled the performance of the S&P Index (up 24% compared to 12%). As Bertrand Russell noted, “extreme hopes are born from extreme misery” — at least if you have been short iShares Russell 2000 ETFIWM! (Note: In its history, the Russell Index never has been as extended relative to the Bollinger Bands.)

* The recent widening in relative performance (Russell vs. S&P) may be a function of the president-elect’s policies toward protectionism and against globalization; the timeliness and extent of impact might be overestimated.

* The Russell Index is more richly valued than the broader indices. The 2016 price/earnings multiple for the Russell Index is 32x and 25x 2017 estimates (before any new effective tax rate) on non-GAAP earnings. The S&P Index is trading at 19x 2016 non-GAAP and 17.5x 2017 estimates. However, the S&P multiple of GAAP is 26x — there is no currently available GAAP multiple of the Russell.

* As interest rates gap higher, the cost of capital is rising for small and medium-size companies: This is occurring at a speed far faster than many previously thought. Large, multinational companies have better and cheaper access to capital through the markets and/or on their cash-rich balance sheets. (Note: This morning’s move in the 10-year U.S. note yield to more than 2.50% may be a tipping point).

* The rate of growth in the cost of commodities and services is starting to accelerate. This hurts smaller domestic companies that are less diversified compared to the larger companies. Remember, mono-line smaller companies often have less pricing power than their larger brethren. (Note: This morning’s $2.35 rise in the price of crude oil to nearly $54 also may be a tipping point).

* Smaller capitalized, domestically based companies are not beneficiaries of possible repatriation of overseas capital. As Russell wrote, “Sin is geographical!”

* The president-elect’s infrastructure plans likely will be slow to advance. There will be some opposition from both parties, members of which will be looking for a revenue-neutral and not “budget-busting” fiscal jump-start. At best, this is a 2018-2019 event. Moreover, the build-out could benefit some of our larger companies (e.g., Caterpillar(CAT) and United Rentals (URI) ) over smaller companies. In the broadest sense, however, infrastructure build-outs rarely contribute to sustained prosperity; just look at the sophisticated and state-of-the-art infrastructure in Japan.
That build-out has failed to bring sustainable economic growth to that country. The same can be said for Canada, which is mired in a 1% Real GDP growth backdrop despite Prime Minister Trudeau’s large infrastructure spending of years ago.

* The president-elect’s immigration policy — building a wall, limiting in-migration and exporting those who are in our country illegally — are not pro-domestic growth and could hurt small to medium-size companies.

* The president-elect’s China policy and broader protectionism policy could end up hurting the sourcing (impacting availability and cost) of many smaller companies, potentially squeezing profits by lowering margins and reducing sales.

Bottom Line

“All movements go too far.”

–Bertrand Russell

My view is that the Russell may soon stop crowing and I am moving toward a more aggressive short of that Index.


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