Courtesy of Daniel Sckolnik of ETF Periscope
“You’ve got to be very careful if you don’t know where you are going, because you might not get there.” –– Yogi Berra
There’s a swagger going on around here, and the equity markets are currently performing as if they are bulletproof.
The fear that has remained a constant undercurrent in the equity markets since 2008 seems to have dissipated to a great degree, not unlike a bullied schoolboy with a memory on the short side. Talks of new highs have begun to emerge among the pundits who populate the financial media universe. Talks of potential all-time highs in the not-so-far-off future. Highs like in the Dow Jones Industrial Average (DJIA) topping 14,000. That’s only 1700 points away.
The Dow has gained over 5500 points in the last two years, almost doubling in value. Even more impressive to some extent is the fact that as of Friday, when it closed at 12,273, it has moved up over 2000 points in five months. That’s a move not unlike mercury shooting up the thermometer of someone suffering a heavy fever.
And of course, it’s not just the Dow. The S&P 500 Index (SPX) has, as one would expect, pretty much mirrored the Dow’s ascent. Ending Friday at 1,329, the SPX has climbed over 500 points in the same two years, and 250 points over the last five months. That’s almost a doubling in 24 months, and over 20% in five. And the Nasdaq-100 (NDX)? Ending last week at 2,379, it has shot up over 115% in two years, and is at a level not seen since the dot.com heydays. That’s almost a ten-year span.
The fact is, since September, the current uptrend has met and overcome pretty much any resistance that has crossed its Bullish path. But is this feeling of invulnerability justified? Or has the equity markets primarily benefitted from the absence of Kryptonite?
Consumers are buying into the feeling of economic growth, if you can believe February’s University of Michigan’s consumer sentiment survey. The survey came in at its highest reading in more than six months.
The problem is, this kind of Bullish market has, in the past, been reflective of the state of the economy, whether overheated or not. That is not what is happening now.
Unemployment remains at around 9%, a level that indicates deep systemic issues remain in the recovery. When factoring in the “underemployed” and those who no longer seek work, the numbers, by some estimates, double to over 20%. Somehow those numbers don’t jibe with those of a healthy economy. Neither does the lack of rebound in the actual housing markets in general, though counter-intuitively, a lot of the REITs have done quite well in the markets.
And while the earnings season, which is heading into wrap-up territory, has largely been encouraging enough to keep the rally going, it might be of value to recall that the bar was set exceptionally low the last few years. So earnings announcements that seem strong relative to previous quarters may in reality be more than a little bit misleading.
What is interesting is that the VIX volatility index, commonly referred to as the “fear index,” stands at 15.69, a number real close to the year’s low. The lower the VIX, the less nervous the equity markets, and each time this year it has come close to 15, it usually is followed with a strong upward bounce, indicating fear. However, recently, the bounces have gotten weaker and weaker.
All these numbers might be fodder for a contrarian feast. After all, corrections inevitably occur, and this market surely won’t be an exception. There has been no correction greater than 5% in the last five months. That’s a long time to travel, especially when the underpinnings of the economy remain arguably on shaky ground.
But the disconnect seems to be continuing on its merry way, and at some point if what is being offered by corporations are not being bought, whether cars or services or whatever, the markets might begin to resemble those bottle rockets that shoot up in the sky in mesmerizing fashion, then freeze in mid-air before bursting into colors and noise.
It’s a fine time to review your portfolio, and while there are undoubtedly some fine stocks and ETFs to be had, a little “bubble prevention” might be a wise thing. Hedging is an art worth learning, and there’s no time like the present to practice it.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
