By: Michael J. Carr of Street Authroity
The SP 500 has now closed higher seven weeks in a row. We need to consider the possibility that we are at the start of another bull market.
Stocks Are Bullish, but Not Bubbly
After gaining 0.42% last week, SPDR SP 500 (NYSE: SPY) is now up seven weeks in a row. While that gain may seem small, it is actually more than three times larger than the typical one-week gain in SPY. Since January 2001, the ETF has delivered an average one-week gain of 0.12%.
Seven consecutive weeks of gains is an unusual price move for the broad stock market averages. It indicates that there is a great deal of demand for stocks and traders are buying. This is obviously an oversimplification, but in general terms, demand exceeding supply is the underlying cause of a price rise in any market.
When stocks bottomed in March 2009, SPY moved up six weeks in a row. That is typical of the price action at market bottoms. We saw similar signs of strength in 2002, and in the Dow Jones Industrial Average at the beginning of the historic bull market in 1982.
Some investors are concerned about the possibility that this strength is signaling a top as money rushes into stocks right before a bubble pops. The problem with that theory is that there isn't a bubble in stocks. Overvaluation is a sign of a bubble, and SPY has a price-to-earnings (P/E) ratio of 16, which is close to its long-term average. At the current level, we are not in a bubble.
Instead of an overpriced stock market, investors holding $2.7 trillion in money market funds are probably looking for bargains in the market.
The total value of the stock market is about $18.9 trillion. Investors have about 15% of that amount sitting idly in money market funds earning only a small amount of interest. This seems like a large allocation to cash for the average investor.
It seems logical that there could be a shift out of money market funds to investments that offer greater returns than cash. Many individual investors are justifiably worried that bonds offer low yields and could be high risk if interest rates rise. These worries could push much of that cash looking for better returns into the stock market.
Cash in money market funds is one source of potential demand in the future for stocks. Reasonable valuation levels are also bullish. These factors support the idea that recent strength in SPY is consistent with additional gains in the stock market. Pullbacks should be viewed as a buying opportunity until there is a fundamental change in the stock market.
Big Names Turn Bearish on Gold
SPDR Gold Shares (NYSE: GLD) fell 3.54% last week, and there could be more downside ahead for gold. Goldman Sachs (NYSE: GS) issued its annual forecast for 2014 and warned investors that gold could fall another 15% to $1,050 in the next year.
Goldman is generally bearish on commodities, and the firm also expects to see multiyear lows in copper and soybeans in 2014.
Hedge fund manager John Paulson, among the biggest gold bulls a year ago, told his clients that he will not be personally buying more gold through his fund because he doesn't know when inflation will start becoming a problem.
Since the beginning of the year, Paulson's gold fund has fallen 63%. His statements indicate that he sees further downside potential in the short term. Paulson is an astute market observer and probably most renowned for making billions shorting the subprime mortgage market.
Despite the bearishness of Goldman and Paulson, no one really knows what gold will do next, including Fed Chair-designee Janet Yellen, who admitted in recent testimony to the Senate, "I don't think anybody has a very good model of what makes gold prices go up or down. It is an asset that people want to hold when they're very fearful about potential financial market catastrophe or economic troubles."
Goldman analysts and Paulson, all known for deep knowledge of the markets, are not fearful about potential troubles. For those looking at gold as insurance against catastrophe, it could be a buy. For traders, there are better opportunities elsewhere.
This article originally appeared on ProfitableTrading.com: Market Outlook: Is This a Bubble About to Pop or a New Bull Market?
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14 thoughts on “Is This a Bubble About to Pop or a New Bull Market?”
Your blog title:Is This a Bubble About to Pop or a New Bull Market?
I agree about the market not being a bubble, due to the fair value of p/e ratios . As far as the second part "or a new bull market", last I checked we are already in a bull market, have been for a while now. The markets are up because of the quantitative easing by the Feds providing the liquidity to keep the markets moving higher. Also, with interest rates so low the only way to make money is to buy stocks. What will happen when QE is tapered or ends? Will the market collapse then, who knows? We just have to take advantage of the gift the US fed has given us and enjoy it while it lasts.
Avinash, how is it different this time.... The last time there was a bubble 07, 08 we made out pretty well pulled money early reinvested as the ship was righting itself and bought alot of foreclosed realestate. I see a new trend in the markets and watching gold and silver just a small part of it. The bigger players have pulled out most of their stocks and are playing small (poker term) ... it is the dawn of day traders making their million and working every step of the way. So I ask again what has changed ? I see a bubble on the horizon but not for a few more years unless China calls in it's debt, but that is another story Im sure.
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If GS says $1050 for gold and others elsewhere claiming $750 or so, what does that really mean? Does that mean a fleeting bounce off the bottom or a firm bottoming? After all, if mining cost is $1100 or $1200 what happens? If you want a gold necklace or a gold front tooth do you use paper stock certificates or real bullion? It is wise to consider the bullion cost versus paper cost. If bullion cost is going up and paper cost is going down then there is a disparity somewhere which must eventually equalize or the miners shut down as they have been. A wise old saying is that possession is nine tenths of the law and it certainly applies to necklaces as well as gold teeth. Traders need to be aware of whether they are dreamers or realists and what the differences are, not that there is anything wrong with paper trading for a paper profit.
NO BODY CAN PREDICT FUTURE. WHAT WILL HAPPEN NEXT SECOND ?/ SO BE CAUTIOUS AND SEND UR MONEY TO WORK FOR YOU I N STOCKS OR EQUATY ONLY THAT CAN SAVE YOU FROM MONSTER OF INFLATION ,KEEP INVESTING SIMPLE ,START WITH A BALANCED FUND DIVIDENED PAYOUT OPTION IF U NEED INCOME TO RUN UR HOUSE AS DIVIDENED FRON STOCKS AND STOCK INDEX FUND EVEN INTREST FROM BONDS IN BALANCED FUNDS IS TAX FREE AT PRESENT IN INDIA ,CAPITAL GAIN AFTER HOLDING FOR ONE YEAR IS ALSO TAX FREE.SO LEGALLY UR IN O ZERO TAX BRACKET AND UR MONEY IS PROTECTED FROM 5 PREDATORES OF UR MONEY IN BALANCED FUNDS 1. INFLATION ,as stocks dividened is tax free and intrst on bonds in balanced funds is also tax free in india. 2. income tax capital gains after one year tax free.3.INTREST RATES 4. MARKET VOLATILITY AND 5TH POOR ASSET-ALLOCATION ,90% of ur returnes depend on proper asset-allocation between stocks and bonds ,and balanced funds r invested in both and balances between bonds and stocks automatically,weather market is up ,down or side ways ,u will get ur dividened income from balanced funds ,chose 2-3 balanced funds with good track record ,rebalace ur portfolio at least once every onth ,as we r in information age and rules of making money r changed from old industrial age bec.of INTERNET WORLD BECAME SMALL AND FLAT.
Bubble? Pshaw, everything now runs on sunshine and good intentions. And don't worry one bit about the actions of the central bankers, they are professionals and know the path to Utopia.
AK-IGLOBAL INVESTMENTS. In such uncertainity i preffer to transfer my CORE FUNDS 60% TO 2-3 GOOD BALANCED FUNDS ,as balanced funds are all weather funds ,weather market goes up ,down or side ways.as it protects us from 5 big money eroder,s . 1 INFLATION .2. INCOME TAX ,3.INTRST RATES 4, MARKET VOLATILITY AND 5TH MOST IMPORTANT SAVES US FROM POR ASSET-ALLOCATION BETWEEN EQUATY AND DEBT ,AS 90% OF OUR RETURNES DEPENDS ON PROPER ASSET ALLOCATION BETWEEN STOCKS AND BONDS AND BALANCED FUNDS ARE INVESTED IN BOTH AND AUTOMATICALLY BALANCE. 2.I WILL PUT 30% IN LARGE CAP INDEX FUNDS WITH LOWEST EXPENSE RATIO ,REST IN MIDCAP ,SMALLCAP,MICROCAP INDEX FUNDS BOTH DOMESTIC AND INTERNATIONAL WITH FEW IN GOLD ETF . 32 MOST IMPORTANT IS TO COVER UR WHOLE FAMILY WIRH ADEQUATE HEALTH INSURANCE AND LASTKEEP SOME IN EMERGENCY FUND IN MMMF,S.OR LIQUID FUNDS ,TAKE ADVANTAGE OF ELSS FOR TAX FREE MONEY .THAT,S ALL UR FINANCIAL PLAN FOR RETIREMENT IS OVER ,IT MUST BE SIMPLE ,FOLLOW LONG TERM GOAL,S as in stock market oney is made by waiting,patience doing nothing ,buy and hold tight,to give ur money to work for u by magic of compounding ,remember story of king and inventer of chess board who just asked one grain of rice in 1st aquare of chess board ,2 in 2ned ,4 in 3red and so on ,till they reach 64 th square of chess board ,kings financer calculate it becomes 19.1 billion,trillion rice grain,s which is not even present i this planet,that is magic of compounding,warren buffett is the proof ,who coverted $100 to 60 billion dollares in 40 yeares,money is not made by buying and selling stocks daily ,than ur making money for taxes and brokerage house. so keep investing simple ,start with balanced funds and large cap inex funds ,keep reinvesting in same,it must be boring but reward,s are unlimited. REMEMBER NOBODY CAN PREDICT FUTURE,so be cautious and invest in low cost index and balaced funds which protects ur oney from above mentioned 5 monters of money,follow ur own instinct and common sense,investing is like learning to swim or drive a car ,no text book or degree can teach u ,except ur experince ,and learning from ur mistakes. DR ANIL GUPTA MD , I LEARNED FINANCIAL EDUCATION MYSELF FROM READING AT LEAST ONE FINANCIAL BOOK EVERY WEEK LIKE 1 WARREN BUFFETT WAY 2.ONE UP ON WALL STREET BY PETER LYNCH AND RICH DAD POOR DAD SERIES BY ROBERT KIYOSAKY,I LISTEN TO AUDIO BOOKS IN MY CAR ,SURF INTERNET AT LEAST ONE HOUR DAILY ABOVE ALL DO REGULAR EXERCISE TO KEEP U PHYSICALLY AND MENTALLY FIT WITH NO EMOTION OF GREED AND FEAR.
One and only friendly advice, "keep far away even from ANY TYPE OF FUNDSSSSSS.
current situation indicates some thing different.
wait Doc until stocks and bonds go down in concert, then tell me how "safe" your balanced fund is.
Pat. Are you really missing Bush's disaster(down to 7 000 or trying to be funny. For me, I love the Obama period so far.
BUSH was a disaster in every sense of the word... I dare a right winger to own him.. other day Bush was boasting to Jay Leno
how will he be judged by the history.. and he says historians are still writing about the first George.. not hid dad but George Washington.. This guy still does not get it.. a disaster we could have done away with...
If it is a new bull market YOU called it or if it is a bubble about to pop you called it but it is OBAMA's fault.
Heads I win, Tails you lose !!!!
" THIS TIME IT IS DIFFERENT "
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