What Will Stop The Stock Market Rally?
Weekly Notes With Tiho — Issue 19
Location: Saigon, Vietnam
After traveling for over five months, and covering half of Eurozone — for both work and pleasure — I am back to blogging about financial markets.
I visited United Kingdom, France, Germany, Switzerland, Serbia, Slovenia, Croatia, Montenegro, Bosnia, Bulgaria, Macedonia, Hungary, Slovakia and the Czech Republic — and while doing so, I managed to do a few investments, boots on the ground style.
I also started the Atlas Investor Podcast, where I discuss economic and asset market trends of various countries.
If you haven't checked it out yet, I recommend you drop everything you're doing right now (including the Bitcoin trade you were about to do at $10,500 per coin) and jump on iTunes and download a few episodes.
If you've ever traveled for five months, non-stop, without a break — you probably would know that it's rather tiring. So I've decided to spent the Northern Hemisphere winter in my South East Asian apartment. Most of the posts will be coming from Saigon in coming weeks.
So... let us re-start with the weekly summaries again. I'll be discussing stocks, bonds, and alternative assets from week to week.
SPY hit yet another record high yesterday, with a move of +1%.
An unstoppable rally, isn't it?
Let's be honest here.
If you're still in, chances are, you're not happy that you are carrying a lighter than normal position.
And if you're not in, well... you're probably emotionally and psychologically dealing with FOMO. What we millennials say when you got the "fear of missing out."
And the market is just not giving you chance to jump back in, either.
It is remarkable to see SPY holding the 60-day moving average for pretty much the whole of 2017, as the historical anomaly statistics continue to pile on.
One of the major stats shows the index at 360 trading days without a 5% drawdown. The last one occurred during Brexit, back in July 2016.
To experience a streak like that, you had to be around and trading in 1996, young man.
Of course, not all of us were. But even those who were, tend to have short memories. The truth is, investors have all but forgotten what volatility feels like.
For example, consider that the actual intra-day low for VIX index was 8.56 only a couple of days ago — lowest reading on record.
Also, consider that the 12 month average of the VIX Index now sits at 11.17 points.
However, these are not necessarily bearish numbers... at least not yet.
If you are a student of history — in particular, financial market history for the sake of this post — you would recall similar low volatility periods in the late 1950s and early 60s, as well as in the mid-1990s.
These periods can last for a long time, and because stock markets are so quiet, it can sometimes feel like its a lifetime.
While we can't get the data for the VIX before the 1980s, when we look at realized volatility and average true range movements of US indices — we can come to the conclusion that this is the quietest and least volatile market in the history.
Twitter commentator Charlie Bilello has some interesting charts which show just how quiet it all is right now.
Moreover, notice how the VIX spikes have been making lower highs since August 2015?
Volatility is coiling into a big compressed ball of energy, and just like a basketball kept under the water... have one misstep and it might just fly back out, smacking you in the face.
And missteps do happen, especially when every Tom, Dick, and Harry are optimists.
Last weeks Investor Intelligence Survey showed 61.5% bulls. Furthermore, three weeks ago that number was at 64.5%, while the spread between bulls and bears hit 50% — a record high in optimism.
This post is starting to sound like there are record going off left, right, and centre.
One thing some of us with a little bit more experience and a couple of cycles under our belt understand is that optimism tends to peak before the price itself.
So why are the market gurus, experts and advisors so optimistic?
Because the stocks have already done so well.
The key phrase here is — already have.
That doesn't mean they won't continue to rise even further, but the point here is that advisors are optimistic because of what has already happened.
The widely followed US index has delivered some strong returns over the short, medium and long-term perspective.
SPY is up +6.6% over the last 3 months, +22.1% over the last 12 months, and 34.4% over the last 3 years.
Clearly, the majority of those 3-year gains have occurred over the last 12 months, as Trump's surprise win sent US stocks upward like a rocket.
Since November of last year, SPY is up every single month apart from March 2017 — when it corrected by a huge -0.31%.
Meanwhile, ACWI (All Country World Index ETF) is up every single month this year — including November, too.
This has never happened since indexes inception in 1988. In my opinion, we are headed for an ACWI bullish clean streak, where all the months will most likely be positive for the first time ever in 2017.
So there we are.
A wonderful 2017 that should have made the lot of you a bit wealthier. My clients certainly are.
If you recall the theme of 2017, I have been banging the table for a diversified switch from US stocks towards foreign stocks, in particular Emerging Markets.
And thats paid off — very handsomely.
However, there is a question of what to do next.
What about investors who have missed out on this rally?
How much longer can it last?
And what about the overpriced valuations — will the next pullback be a buying opportunity or a bull trap?
These are all very important questions and I'm happy to help you achieve your performance goals and reduce your downside risks.
If you would like to know how I am positioning my client's portfolios, which assets I am buying and where I see valuation opportunities — let us make arrangements for an hourly investment consultation.
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