How High Is High? Can The Bulls Charge On?
In doing our due diligence for our members we constantly explore websites that allow average traders to make stock predictions. Many of them try and make their own stock predictions tend to do so using technical trading tools. They prognosticate on the direction of certain equities based on triangles, trend lines, moving averages and more. What I am astounded by is how each one of them can have a different opinion from one to the next. One thinks the stock is going to tank because it looks like a descending triangle. Another thinks it is signaling a breakout to form a new high.
The interesting thing though, is when it comes to the general market. They all seem to think the Dow and other averages are too high and “done”. It seems that they all look at the general market the same way. They analyze it like a single equity which has climbed too high based on its current earnings and value. In general, they are wrong as witnessed by the continuing new highs experienced in the market. The question is, why is this the case?
The stock market always has the potential to continue to breakout. Stock prices may go up more, as people continue to earn hearty returns. More loose money comes to the market, and prices go up further still, attracting even more money. Rumors about the longest-running bull market in history swirl and more investors come into the market. After all how can you beat 5% GDP?
There are many reasons for this boom, but the main reason we believe involves sector rotation. If you look at the current investment situation, there is really no place else for the money to flow. Bonds and debt instruments are still not paying enough to be worth putting your money there. Commodities present too much risk. Real Estate once again shot up to unrealistic multiples and investors are left scratching their heads for alternatives to stocks. Currently there are no good replacements. So in their quest for diversity they seek out other areas of the market that have not done as well. They rotate money from one sector to another. But the money still stays in the stock market.
You see this reflect clearly in the Dow which has natural diversity built into it. Some weeks the Pharmaceuticals like Merck or Pfizer or Johnson & Johnson are running. The next week they are flat and the technology stocks like Apple, Cisco and Microsoft are running. While each sector runs, the other sectors don’t seem to sell off. This continues to drive the average forward - week after week.
Business is looking better than ever with business enthusiasm at record levels. The Market continues to make new all time highs. President Trump’s focus is on long-term economic fundamentals, which has remained exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increased wages for the average American worker. The recent tax cuts and regulatory reforms continue to strengthen the U.S. economy and continue to increase prosperity for the American people.
Companies have enormous profit margins right now and are they are using their excess cash to buy back its shares. This, of course, reduces shares outstanding. When companies with Billions in cash like Amazon buy back their shares, this reduces the need for the big mutual funds, etc.
For now Stocks continue to soar without taking a breather for a correction despite all the craziness and volatility going on in Washington, continued tension with North Korea and worries about trade Tariffs. How much longer can the market hold its nose up high and pretend that the world is a stable place? We know how hard it is for our society to loosen its grip on the concept of Ever More and to contemplate the idea of Enough. But we recommend trying it.
The stock market just won’t go down, despite geopolitical concerns, over stretched valuations and an unpredictable president. Understanding why the Market keep rising is one way to judge how long the rally is going to last and what will happen next.
Will this upward spiral end? Of course it will! But it may take a lot longer than people think. President Trumps economic stimulus has a strong focus on manufacturing. This has not been a focus for a long time. The Dow industrials are geared to be able to take maximum advantage of this. The companies that make up the average could see a long period of solid earnings growth. How does this affect the average investor? Well as we all know, in the stock market, all ships ride high tides. If the Dow keeps going up, expect the rest of the market to follow suit.
In conclusion: Don’t listen to the pundits and naysayers who say the market is overvalued and miss out on major increases in your portfolio because people say the market is “too high”. We firmly believe the greatest risk to the average investor at this time is being underinvested.
Rather than worry about whether now is the best time to buy, just keep buying. Market high or market low, just keep buying. You should think of buying investments like you buy your food. Make it a habit to invest your money like you make it a habit to pay your bills. As long as you can buy, you should continue purchasing equities. Just do it! Thank us later...
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Till next time... As always, Happy Trading!
