The Dow Jones (DJIA) is pushing up against record highs on Monday. The futures market jumped 100 points in early trading, pointing to another strong start on the stock market.
But this “near-vertical” price action has some investors nervous. As the stock market carves out fresh record highs, Chief Strategist at Real Investment Advice, Lance Roberts took some money off the table. “This is nuts,” he said his latest report, concluding that we’re in the midst of a classic late-stage euphoria rally.
Near-vertical price acceleration in the markets has been a historical hallmark of late-stage cycle advances, also known as a ‘melt up’ phase.
Roberts doesn’t necessarily see an imminent crash, but the risk-reward ratio is “not in favor of the bulls short-term.”
Dow futures contracts enjoyed a triple-digit leap on Monday, clawing back Friday’s losses triggered by weak jobs data.
S&P 500 futures and Nasdaq Composite futures were up 0.37% and 0.49% respectively. Bitcoin climbed back above $8k over the weekend, trading at $8,105.
In his report, Roberts also cites analysis from Doug Kass who warns that stocks are completely detached from their fundamentals.
The climb in stocks will likely end badly as it is not supported by the fundamental (social, economic, political and geopolitical) backdrop.
Indeed, corporate earnings have declined for three straight quarters, yet equities are at record highs. Meanwhile, geopolitical tensions have flared in China, Hong Kong, Iran, and Europe.
Investors are ignoring the fundamentals and gorging on liquidity injections from central banks.
No longer is the market hostage to the real economy or sales and profit growth. Instead, liquidity is seen as an overriding influence, actually it has become the sine quo non.
The best visualization of this is the Buffet-indicator – a measure of total stock market capitalization of the United States relative to U.S. GDP. The indicator is now higher than any time in history, including prior to the dot-com crash and 2008 recession.
As the stock market explores new highs, investors are throwing money at the market. Greed and complacency is yet another hallmark of a late-stage bull run and often indicates an imminent crash.
Investor complacency has also reached more extreme levels with PUT/CALL ratio now hitting historically high levels.
This chimes with CNN’s fear and greed indicator which hit highs of 93 last week, representing ‘extreme greed.’ This has historically resulted in an explosive ‘melt-up’ in stocks before a deeper correction.
The stock market will be put to the test this week with a number of big events on the calendar. A Chinese delegation heads to Washington DC today in anticipation of signing the phase one trade deal on Wednesday.
Corporate earnings season also kicks off this week. Major Wall Street banks are first in the firing line, with JP Morgan and Citibank reporting on Tuesday. Blackrock, Goldman Sachs, Bank of America, and Morgan Stanley follow later in the week.
This article was edited by Samburaj Das.
Last modified: January 22, 2020 11:39 PM