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You are here: Home / Opinion / Are Stocks Approaching The Point Of Maximum Optimism?

February 19, 2017 By Joe Marwood 1 Comment

Are Stocks Approaching The Point Of Maximum Optimism?

Last week saw the main stock averages continue their upward price run with the S&P 500, Dow Jones Industrial Average and Nasdaq all posting all-time record highs.

I mentioned in a previous article the possibility of a blow-off top for the main indices later leading to a sharp correction.

The way it stands, markets have been on an impressive winning streak and have not experienced a 20% correction in 1400 days, one of it’s longest streaks.

The S&P 500 hasn’t had a 20% CORRECTION in 1,400 days. 1 of the longest streaks @StockTwits https://t.co/OFl8nVgJyj pic.twitter.com/ppVU8iRhad

— Steve Burns (@SJosephBurns) February 15, 2017

Monthly charts show that the indexes (especially the Nasdaq) are entering into an extreme overbought, parabolic phase. A phase that I have warned about many times before.

nasdaq 100 chart monthly
Nasdaq monthly chart. Approaching maximum optimism.

Market valuation measures such as Shiller CAPE and market cap-to-GDP are in extreme categories and investor confidence is at new highs.

As well as these signals, I have noticed a plethora of new low volatility strategies entering the market in recent weeks.

Such strategies are now classed as ‘easy money’ and another signal of over-exuberance. Many are likely to fail as soon as we get a decent pullback.

vix index chart
Vix Index. Low volatility strategies are in vogue

US stock markets look increasingly like a bubble and as we know with bubbles, the bigger the bubble gets the bigger the pop will be.

It  seems that Goldman Sachs chief equity strategist agrees saying ‘financial market reconciliation lies ahead’:

“We are approaching the point of maximum optimism and S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected.”

According to Peter Schiff:

‘The Federal Reserve has acted so slowly in increasing interest rates because they know another crisis is coming and they just hope they do not get blamed for it.’

This seems to ring true. Unfortunately, it is the relaxed attitude of the Fed that is helping to fuel the upward rally.

An awful lot of people are long stocks and bears have been severely punished for taking the other side.

However, it only takes a slight wavering of belief for the cards to come crashing down. All it takes is a bit of news or a small drop in momentum and some selling will naturally take place.

As soon as some investors sell, we are likely to see a rush of profit taking as investors try to cash in on their gains. The big question will be whether the market will get bought on the dip (as has been the norm) or whether we will see the beginning of a new bear market.

I would not be surprised to see the market open on a gap down one morning (sometime within the next couple of weeks) which then leads to the start of a 15-20% pullback. What happens after that is unclear.


Thank You For Reading

joe marwood profile pictureJoe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.


Disclaimer

This post expresses the opinions of the writer and is for information or entertainment purposes only. It is not a recommendation or personalised investment advice. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided. Past performance, historical or simulated results  are not a reliable indicator of future returns and may not account for real world settings. Financial trading is full of risk and margin trading can lead to financial losses totalling more than what is in your investment account. We take care to present accurate analysis but mistakes in backtesting and presenting of analysis regularly occur. Please read the Full disclaimer.


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Thank you to everyone who takes the time to leave a comment. Your feedback, constructive criticism and identification of mistakes is welcome. In order to concentrate on work I may not have time to respond to all comments.

Filed Under: Latest Content, Opinion, Picks Tagged With: Latest Updates, Picks, stocks

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Comments

  1. Peter says

    February 25, 2017 at 5:33 pm

    Great article, very much agree with you. I guess it’s time to buy some protection.

    Reply

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About The Author

Joe Marwood is an independent trader and investor specialising in financial market analysis and trading systems. He worked as a professional futures trader for a trading firm in London and has a passion for building mechanical trading strategies. He has been in the market since 2008 and working with Amibroker since 2011.

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