It's Tough to Be a Bear

Clearly the stock market is never going down again. Dow 20,000 before 15,000. Forget persistent high unemployment, forget a broke Europe and China in slowdown. Let's buy some more!!

I am a student of the market and something of a lay historian. So I pay attention to things like price earning ratios on the S&P 500. Which are now at levels not seen since the 2007 highs before the Great Recession truly got underway.

So, the question remains, Is the stock market overvalued or are we in a new age when stocks can never go down?   The question is not as dumb as it sounds. Please do take the time to read the article I highlighted in the previous sentence.

I am a contrarian by nature. When lots of people agree with me I get nervous and when I am a quasi-lone voice I am comfortable. Let me quote from the article highlighted above:

We see record levels of margin debt: Margin debt for September reached a record all-time high as investors piled into the stock market with abandon. Previous all time highs in margin debt were also seen in 2000 and 2007.

Retail sentiment is extremely bullish: AAII Investor Sentiment Survey for the week of Oct.16 shows 46.3% are bullish, up 4.9% from the previous week and above the long-term average of 39%. Bears are also in short supply with 24.9% bearish, down 8.7% from the previous week and below the long term average of 30.5%.

So, we see investors piling into the stock market with borrowed money (that's what margin debt means) and hardly anyone (besides me) is Bearish.

The current stock market's lofty level feels to me to be a classic case of The Greater Fool Theory. Buyers are hoping there is a greater fool than them coming to pay ever higher prices. I am reminded of the tech bubble in 2000 and the housing market in 2006. This is all going to end very badly.

And could I be wrong? Sure. As long as the government keeps running the money printing press at full tilt and real interest rates stay close to zero then that money has to go somewhere, right?

I am not advising people to recklessly abandon their stock holdings. I am advising caution. Take some profits along the way and be sure to have downside protection using options.

Teaching average folks how to use and apply that downside protection is what I am all about. For more information please do not hesitate to contact me. Just click on the contact heading