There is a certain market doctrine that in order to rise stocks are meant to climb a “wall of worry”. Along with other immutable laws of free market economics this market has completely ignored this age old adage. Forget climbing any walls of worry. That is for wimps. This market just smashes through them!
Now that everyman and his dog are screaming to anyone listening to buy stocks, is it folly to stay out of this incredible move?
Perhaps. Perhaps not.
My personal style means I look to try and identify opportunities to enter trades towards the start of a decent move. When the Dow rallied off its 200MA that was probably the time I should have got in. For various reasons I missed that entry point and I have to admit, I am a little green about it. But no matter, that is in the past. All that matters now is what the charts say, today. Below is an 8 month view of the Dow;
Overcooked is the first thought that immediately leaps to mind.
Buying into a parabolic market like this does not sit comfortably with me, so it is best to sit out. However, I am being sorely tested at the moment. Wherever I turn every market commentator appears to have been swept up in the wave of euphoria gripping US stocks. This video on Yahoo! Finance’s Breakout service is a prime example. I agree that the market couldn’t care less if I think a correction is due, but eventually there will be one. There always is and, as I wrote yesterday, the question will be whether or not the correction becomes a crash.
In terms of the case for being bullish, I’d like to think I understand all the arguments. The market is awash with liquidity, money is piling in from the sidelines, economic data is improving and there is little prospect of the Fed announcing its dreaded taper in the foreseeable future. Really, I do get it. I’m just not buying into it. There are too many warning signals out there, not least the contrarian in me reacts strongly against such extreme unanimity as we are currently witnessing.
One warning worth mentioning concerns the use of margin debt. Zerohedge have reported on this quite a lot recently. I normally wouldn’t advocate using Zerohedge to inform trading strategy as anyone following their “buy physical gold, go live in a cave, the world is about to end” mentality probably doesn’t have any money anymore. However, the chart below does point to another extreme;
Relative to the economy, margin debt has only been ever been higher twice before, in 2000 and 2007 (there are those dates again!). Although we are still a little way from those extremes, it seems likely we could surpass them in this Fed-fuelled market. Until we reach such a point, the bulls still have a chance to have their fun, but the consequences will likely become more severe the higher this ratio rises.