Hey y’all, it’s Troy (trader, investor, whatever you want to call me). I just want to give y’all an update on the stock market, and in particular, the U.S. stock market. Here’s what’s been going on in the 2nd half of 2013 and what I think will happen in the first half of 2014.
Please keep in mind that often times, my forecasts are dead wrong. I thought the market would crash in the 2nd half of 2013 – it didn’t. But that’s the beauty of being a trader – I don’t need to be right. I just need to make money. My forecasts are very flexible – my opinions change with the market. 2013 has been an insanely profitable year for me despite my stock market call being dead wrong. That being said, I’m not an economist who needs to be stubborn with his views. Economists can’t make money – only traders and investors can.
Also, please note that I am writing this on Dec 29 2013. Thus, by the time this post is published here on RFI, some circumstances may have changed. So with that being said, let’s jump right into the U.S. stock market. First a little background on 2013.
This is a Bubble
By May 2013, all the skillful traders, hedge fund managers, and investors knew that the U.S. stock market was in a bubble. When the S&P broke it’s 2007 high, the bubble was officially “in”. Why? Because the fundamentals of the U.S. economy just aren’t equivalent to what things were back in 2007, the go-go years. (Tell that to the unemployed folks).
Based on many market indicators such as sentiment (how investors feel about the stock market), the U.S. stock market was (and still is) in a bubble. Investors are way too bullish on stocks.Corrections larger than 5% have been few and far between this past year, which is very unusual (which is to say, stocks are in bubble phase).
So if you think that all is good in the hood and this is a new secular bull market that will last for years and years and years, you need to get your head screwed on right (no offense to you personally).
Every long term bull market in American history is caused by huge fundamental changes in technology an innovation. The 1950s and 1960s bull market was caused by the massive introduction in consumer appliances. The 1980s and 1990s bull market was caused by the computer and internet revolution. All of these innovations were very obvious to the average Joe – it didn’t take an Einstein to realize that the world was changing. But what innovation can drive the (what the dummies call) “secular bull market” today? Little iPhone apps for 99 cents that help you waste your time? Internet services that help you manage your finances better? These aren’t groundbreaking innovations!
Serious groundbreaking innovations just aren’t technologically ready on a mass scale! Nano-tech, space exploration, green energy – these industries just aren’t ready!
Why This Bubble will continue in the first half of 2014.
But just because the market is in a bubble, it doesn’t mean that you should sell or go short. That’s how legendary fund manager Julian Robertson got destroyed in 1999 (dot com bubble).
From January 2013 to October 2013, the stock market’s bullish ascent was completely irrational. Most of the price advance was supported by:
1. The Federal Reserve’s QE: basically, the U.S. central banks buys ton of securities, which pumps up stock prices.
2. Investors who, after being destroyed by the 2008/2009 crash and avoiding stocks like the plague from 2009-2011, finally decided to jump back into the market.
Stocks during this period were not propelled by super awesome fundamentals. That’s because if you looked at the economic data, the numbers weren’t even super awesome. In other words, this part of the market was purely propelled by herd mentality – aka bubble.
But beginning in November of 2013, the U.S. economy and all other economies around the world (including Europe, the problem child over the past 3 years) suddenly displayed insanely awesome economic data. In other words, the economy was actually getting a whole lot better. At first I couldn’t believe this myself, but as a trader, I must face the fact, regardless of what I want to believe.
But that’s not to say that the improving economy is a sound reason to support the insane stock market advance right now.
Based on my analysis, I’ve found that whenever the stock market reaches bubble mode, nothing short of a fundamental problem (eg the economy suddenly deteriorates) can cause even a correction that’s larger than 5%.
At the moment, the fundamentals are obviously super awesome. Nothing can support a correction that’s larger than 5%. Whenever the market falls, new investors just pile in to “buy on the dip”.
Lastly, I’d just like to give a note of caution. Although I myself am riding the bubble on the bull side, I’d like to give you a serious sign of caution. Seriously, becareful. Don’t be stupidly overjoyed with your profits because this is a bubble. A bubble bursts much faster than it inflates.
With that being said, happy New Year everyone, and let’s make 2014 a good one!
As y’all guys and gals probably know, I used to blog at The Financial Economist. I couldn’t keep that up because my day job (trading) was just getting too intensive. Now, as a hobby, I’m trying out a new blogging platform called Ghost. It’s like WordPress but much more simpler and minimalist (which has been all the rage since Steve Jobs died). So if you’re interested in trying out Ghost, just head on over to my site Ghost For Beginners. Over there I wrote a couple of tutorials on how to install Ghost, publish posts on it, etc. So if you’re interested in an alternative to WordPress, check it out!
What are your predictions for the U.S. stock market this quarter?
If you guys have any questions, just comment here!
Interesting info troy. I’ve thought the markets are in a bubble for a long time now but they continue to defy me. I just can’t see a way out of QE and the low rate environment that doesn’t bring a lot of pain with it, but maybe I’ll be defied on that too!
I think you’re a little off saying that there is no technology out there helping create the current boom. There clearly is: energy. Right now, we’re in the midst of an unprecedented energy boom in the United States in particular, brought along thanks to fracking (regardless of anyone’s political/environmental feelings on it), natural gas, and alternative energy (including expansion in wind and solar). Combine that with stricter federal gas mileage standards that are going into effect on US autos, and we’re shifting from importing significant amounts of foreign oil towards being an energy supplier for the world and developing countries. This in turn is bringing money into the United States that can then be spread to other productive uses – manufacturing, technology, biotechnology, etc. Throw in pent-up demand for housing/automobiles and other consumer goods from the recession, as well as US businesses with tons of cash on hand looking for productive uses for it after the recession, and I think you’ve greatly undersold the outlook of the US economy and markets.
Plus, timing the market (or even trying to offer 1 year predictions) is a complete fools errand. Invest your money broadly in a low-cost index fund(s) appropriate for your asset allocation, continue contributing to it, and ignore the noise.
Corporations aren’t spending that cash – they’re hoarding it (the only way corporations are increasing earnings is by cutting costs. Now, increases earnings are getting harder and harder because there are only so many costs you can cut).
The fact that you don’t believe the market can be timed sounds a bit ignorant. Oh well. Most people can’t time the market, whereas some can.
I think this will be another record-breaking year! (I’m an eternal optimist!)! But yes, 2013 was a great year!
Why is QE bad? The 80s was fueled by falling interest rates, military spending, an oil boom and communism’s struggles. 90s was technology, QE is the purchases of bonds, bad loans, and zero interest rates. GDP is higher today than it was in 2007, company profits are at an all time high through squeezed labor and increased productivity. Real profits earned in a zero rate environment is the same as increased profits due to falling labor and interest cost.
Heck even Dr Doom Roubini is optimistic about growth and doesn’t believe we’re in a bubble. Only unemployment is the only number that doesn’t exceed 2007, consumer spending is an all time high, housing is coming back, and we’re going to be in a low interest rate environment until 2015. Like the above poster stated we’re in an energy boom, manufacturing is returning to America. Think of all the innovative products and companies over the past few years (Twitter, Facebook, even Groupon are all American based.) Dow 18,000 with Dow 20,000 by 15 or 16.
This is some very pessimistic stuff to read. While stocks have been on a great run, I don’t know if I would call people who think it is a bull market wrong. We have seen great technological advances, but not the kind like inventing the assembly line.
New methods for doing existing actives are available today that could never have been conceived of before. That is allowing companies to run much, much more efficiently than ever before. That means profits. Big profits.
A bubble would mean there is no underlying value to explain the increased price of assets. I see many reasons for stocks to be up.
My predictions for the US stock market this quarter is that traders will continue to exchange hundreds of millions of shares at a speed much faster than the fundamentals are changing, and many companies will pay dividends. The number of shares that I own will increase.
Question for you Troy: how many people have to believe there is a bubble before it becomes impossible because their pessimism holds prices down? Let’s remember that just as blind faith in a market that can never fall causes it to do that, so too can fear that the market will go too high prevent it from doing that.
And finally a funny story on productivity and new technology. A business consultant told me this a few months ago. Several decades ago (in the 80s I think) he went to visit a plant for a major car parts manufacturer. He asked the manager of the plant what percentage of the time it was actually running. The manager started off by closing the door and asking “will you tell my boss about this?”… and he suspects the manager overstated the number anyways. Today that same plant spends over twice as much time operating normally simply because it is better managed. According to this consultant, many industries that he sees have still not undergone that same improvement in productivity that they are capable of. If you’re going to bet against economic progress you have to be really sure because there is a lot to know!
Troy, the stock market is in a serious bubble. A correction will eventually happen. Now, this doesn’t mean that the markets will not continue to go higher. Its just that when this damn bubble pops its not going to be happy time. No one knows when it will happen. People need to understand this and realize that if they are going to invest in the markets that it is a speculation. I for one do not believe that the stock markets will perform as well as last year but I am no expert either. Thanx for the nice post.
The stock market is an everyday term we use to talk about a place where stocks and bonds are “traded” – meaning bought and sold. Thanks for the useful and informative update!