Friday, August 15, 2014

Why The Stock Market Will Go Only Higher

... is because it is totally irrational.

For each of the 2 pictures below, ask yourself: Is this bullish or bearish?

Inflation adjusted S&P500

4 different valuation metrics

These 2 charts come from a post by John Hampton at Solar Cycles. I know I've been playing the bearish tune for quite a while now, but I really see the market as very richly valued!

This Zerohedge post lists down 14 reasons why the US stock market may head lower. Ominous? It should be. I rarely hear any bearish sentiment out there, which makes me even more fearful.
#1 The U.S. junk bond market just experienced "a 6-sigma event" earlier this month.  In other words, it is an event that is only supposed to have a chance of 1 in 500 million of happening.  Billions of dollars are being pulled out of junk bonds right now, and that has some analysts wondering if a financial crash is right around the corner.
#2 The last time that we saw a junk bond rout of this magnitude was back during the financial crash of 2008.  In fact, as the Telegraph recently explained, bonds usually crash before stocks do...
Will the same thing happen this time around?
#3 Retail sales have missed expectations for three months in a row and we just had the worst reading since January.
#4 Things have gotten so bad that even Wal-Mart is really struggling.  Same-store sales at Wal-Mart have declined for five quarters in a row and the outlook for the future is not particularly promising.
#5 The four week moving average for mortgage applications just hit a 14 year low.  It is now even lower than it was during the worst moments of the financial crisis of 2008.
#6 The tech industry is supposed to be booming, but mass layoffs in the tech industry are actually 68 percent ahead of last year's pace.
#7 According to the Federal Reserve, 40 percent of all households in the United States are currently showing signs of financial stress.
#8 The U.S. homeownership rate has fallen to the lowest level since 1995.
#9 According to one survey, 76 percent of Americans do not have enough money saved to cover six months of expenses.
#10 Rumblings of a stock market correction have become so loud that even the mainstream media is reporting on it.  For example, just check out this CNN headline from earlier this month: "Is a correction near? Wall Street on edge".
#11 The civil war in Iraq is spiraling out of control, and Barack Obama has just announced that he is going to send 130 troops to the country in a "humanitarian" capacity.  Iraq is the 7th largest oil producing nation on the entire planet, and if the flow of oil is disrupted that could have serious consequences.
#12 As a result of the conflict in Ukraine, the United States, Canada and the European Union have slapped sanctions on Russia.  In return, Russia has slapped sanctions on them.  Will this slowdown in global trade significantly harm the U.S. economy?
#13 The three day cease-fire between Hamas and Israel is about to end, and Hamas officials are saying that they are preparing for a "long battle".  If a resolution is not found soon, we could potentially see a full-blown regional war erupt in the Middle East.
#14 The number of Ebola deaths continues to grow at an exponential rate, and if the virus starts spreading inside the United States it has the potential to pretty much shut down our entire economy.
Unfortunately even for investors that have no exposure to the US, the US is the more important financial market in the world, for now. That means, if the US tanks, you can be rest assured that it is going to drag down the rest of the world, in varying degrees for varying durations.

Sure, maybe all the recent geopolitical news is clouding my judgement. The US sure loves getting themselves involved in other people's problem. Globo-cop? I think that the problem in the Middle East, both in Isreal and Iraq are 2 huge problems that will not be resolved quickly, with Iraq being the much bigger problem. Ukraine has another set of issues, and although I doubt things would escalate to have direct military intervention from other nations, things there looks unlikely to get better any time soon. Add that to the stuff going on because of what happened in Ferguson, and now you've got plenty of stuff to worry about. But sureeeee, you could discount all of that and say that those issues are getting better, but then let's look at raw data.

(OT: Someone made a comment about the death of Robin Williams that was sadly so true: "Thousands of innocent people are being displaced and killed in places like Ukraine, Syria and Iraq.... but then one celebrity dies and it is suspected suicide, and now suddenly the whole world talks about how sacred life is." No disrespect to Robin Williams, but the hypocrisy of people is just disgusting.)

GDP figures have been coming out lately, and it has not been looking good so far, no no. The recent French, German and Japan figures speak for themselves. Europe looks set to fall back into recession mode with the problems from Portugal and Greece starting to resurface. Add that to the fact that the Russian counter-sanctions on EU is likely going to slap them in the face, the macro picture really doesn't look good to me.

With all major indices surging for what seems to be bad news and on thin volume, it really makes me wonder why it feels like I am the only silly person being bearish all the risk assets. Why all the panic-buying? I am seriously confused.

I believe that short-term, the markets are overbought on ridiculous news. I have added on more shorts to the Russell 2000, Nasdaq and the DAX.

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