The 2014 American Trader Study by Scottrade indicated a high number, 97%, of U.S. traders were optimistic on their investments. Perhaps it is a sign of the times but my initial reaction was, ‘wow a crash may be coming.’ This is nothing against the folks at Scottrade and or even a general contrarian approach.
As you all know, over the last five years we have been in one of the strongest bull markets in the history of the U.S. stock market. As you also know the economy over the last five years has not exactly been booming. No one has mistaken the strength in equity markets with a strong vibrant economy. Most analysts attribute equity strength to Federal Reserve intervention. Mark Spitznagel noted in our interview with him in the April issue of Futures that the Fed is pushing investors towards risk assets like the stock market. Of quantitative easing he said, “If you are trying to prop up the stock market, if you are trying to save people who own risk assets like banks, it was absolutely necessary, in the short-term. There is no doubt that the Fed is capable of pushing risk assets. We shouldn’t be surprised that the market has gone up and continues to go up but it can’t go on forever.”
In fact, equities took a short violent turn downward a year ago when Fed Chair Ben Bernanke simply hinted at tapering QE.
Futures contributor Jeff Greenblatt (aka Fibonacciman) looks for Gann based cyclical turning points in the markets and points out that these turning points often coincide with news events that inevitably the move is attributed to. Jeff likes to stick to what his cyclical analysis tells him and points out that traders need to be alert when these important cyclical windows hit but that they do not always signal a huge reversal, just the likelihood that if such an event will occur, it will happen during these windows.
Other analysts have been predicting a market reversal for some time. It doesn’t mean that they are wrong but being wrong on the timing is everything. Throughout the 1990s many analysts saw the market as being way overpriced and in need of a strong correction, or worse, but most lost money. As the oft repeated quote from John Maynard Keynes goes, ‘the markets can stay irrational longer than you can stay solvent.”
Greenblatt would often express doubt of a major reversal in recent years because there has been that underlying concern throughout the technical community. Going back to Spitznagel’s quote— “it can’t go on forever”— may give bears a clue. When people start to believe that it can go on forever is perhaps the signal to be careful.
This brings us back to the Scottrade survey. Is this a sign of irrational exuberance? Back in the 1990s many cynics point to that quote from Fed Chair Alan Greenspan in reaction to perm bulls declaring a new paradigm when confronting unprecedented high valuations. But you may also recall that quote coming several years before the 2000 crash.
I am not in the business of predicting market moves but would say that these types of surveys are a good thing to monitor. Brian Bachelier, vice president of Active Trader Strategy for Scottrade, Inc. said, “Traders surveyed are telling us they are optimistic, feelings of apprehension for an impending bubble have yet to set in and they are still eager to capitalize on the energy of the market.”
I would take issue with the statement: ‘feelings of apprehension for an impending bubble have yet to set in.’ Rather those feelings have been with us throughout this improbable bull move and have subsided as investors may now be at the point of saying—like many did in the late 1990s—maybe it is different this time.
As Greenblatt has noted before, when folks are worried that markets are overvalued and due for a correction there is little chance of a crash, it is when nearly everyone is sure that there is clear sailing ahead that you need to watch out.