2014? Ned Davis Research has done a fair bit of work on stock market behavior since 2009-ish, and has concluded that due to the rise of ETF trading, among other factors, the stock market’s behavior is quite different than pre-2009. For example, since 2009 the stock market has experienced “breadth thrusts” at a far more rapid clip than it has historically. (Breadth thrusts are market rallies, typically out of depressed-sentiment bottoms, that see an extremely high percentage of stocks participant in the rally.)
And since the secular bull market began in March 2009, we have seen three cyclical, or near-cyclical, bear markets in 2010, 2011, and 2015-2016; a smoking hot, high-participation bull market in 2013; and two choppy topping processes in early 2011 and late 2014 into mid-2015. In other words, we have seen a wide variety of market behavior in the “Age of ETFs”.
Now, the stock market is going to do whatever the heck it wants. It could rocket upward another 30% before entering a 1987-style crash. Who knows. But all of the above to say, I believe we have seen a sufficient number of different market environments in the “Age of ETFs” to make a reasonable comparison of current conditions to conditions since 2009.
Where market analogs become highly dangerous is in merely comparing price patterns. That strategy is nonsense, as even the most famous market analog “coup” by PTJ leading up to the 1987 Crash did not actually work as intended! So I much prefer to compare patterns of conditions, not charts.
Again all that to say, as I’ve been studying the deteriorating market internals over the past couple of months I have consistently arrived at the conclusion that current conditions are quite similar to 2014, which would suggest we are close to the beginning of a months long topping process. But that will be only known in hindsight, and market participants must play the market as it lies.
Lastly, Sentiment Trader is out with a good chart this evening highlighting the tendency of the market to peak around this time of year since 2013, lending credence to the 2014 thesis:
Anecdote. I did not invest thru the 1996-2000 bubble, so I cannot say what it was like for “plain vanilla” equity managers to find ideas at reasonable valuations. But what I can say is that it is currently becoming incredibly tough, with many really capitulating on valuation standards in order to cram new money into the market. This is classic “froth” behavior, even when simply comparing to post-2009 market conditions.
My all-time favorite contra indicator just came out with a BUY rating on HD using hellaciously aggressive numbers to justify it. And this individual is only becoming more pompous the farther the bull market climbs.
We need a good 5-10% washout to take out the weak-handed froth and set the stage for the final leg of the cyclical bull market that began in early 2016.
China. I am far from an expert here, but simple observation via newspapers suggests Chinese companies looking to expand overseas in order to move currency out of China have been huge beneficiaries of easy global monetary policy. I have not tracked the precise figures, but the leverage ratios of some of these global acquirers reached insane levels, and already they are being forced to ratchet back.
And while perhaps part of China’s crackdown on anything and everything uncouth ahead of its “Congress”, I cannot help but think China’s debt binge unwind is market-significant.
(Really deep, I know.)
Deere. More signs of easy money froth, just today the WSJ had a front page article on how Deere has aggressively ramped up its agriculture lending, which has placed it almost directly in line with some of the largest traditional agriculture lenders in the US. Deere’s lending has potentially single-handedly allowed the Farming industry to manage thru the commodity downturn. How this plays out long term I have no idea, as Deere could successfully turn itself into almost a “Tractor as a Service” entity that only leases agriculture equipment. But it’s just another sign of MonPol-related froth.
Housing. More MonPol-related froth. My local suburbia-ish housing market is absolutely smoking hot right now, with a friend recently one of six bidders to emerge in a day (hot for our area); commercial real estate going for 2% cap rates; and new supply rapidly coming into the condo market.
Also, I was recently in Australia where a local couple explained to me that their accountant recommends a strategy of “negative gearing” on their three properties. “Negative gearing” being where the interest expense is higher than the rental income…for the tax benefit. (All according to my rudimentary understanding based on a couple surface conversations.) They “hope” interest rates don’t rise 🤔
FAANG. It is extraordinarily difficult to bet against these names right now given the bullet-proof chart patterns, squeaky clean balance sheets (for most), secular growth, and GARPy valuations. Shorting them would be suicide. But going back to our “post 2009 environment” framework, these names and their ilk have not gone up in a straight line (until recently), and have gone thru several bouts of flat-line performance. Again, the market can do whatever it wants, and they could continue to the moon, as Jim Cramer may lead one to believe; but using the “sell when everyone is greedy” framework, IMO these stocks are WAY overloved at present.
Media. The content companies represent a low-multiple area of the market that appears to deserve to be “cheap” based on long-term industry trends. But as evidenced by copious amounts of Malone commentary in recent years, and now DISCK’s overtures to SNI, one could see a path to market multiples for these stocks as investors begin to view them as scaled platforms for content creation, potentially of interest to outside players looking to enter the content creation business.
Brands. Lots of commentary around the power of brands in the “Age of Amazon”. Dollar Shave Club trimming Gillette’s market share, for example. I don’t know…
…I still automatically go for Colgate, Heinz and Tide…even online. Kraft still makes the best marshmallows. Starbucks TROUNCES local coffee shops. Dominoes is just fantastic. McDonalds and Burger King are still killing it.
[Note: Last half of this was written with eyes half open.]