Here’s Why “Irrational Exuberance” Can Last Longer Than You Think…
The current stock market environment feels a lot like the bull market that ended in 2000. The problem is that we don’t know where we are in that timeline.
The chart below offers a long-term view of that bull market.
Many current investors weren’t active in that stock market. And while most remember how that bull market ended (who will ever forget the dot-com bubble and subsequent crash?), but they don’t remember the details of the rally.
As the chart shows, a large part of the bull market came after stocks were overvalued.
In December 1996, there were concerns that stocks were in a bubble. In a speech that market historians remember well, Federal Reserve Chairman Alan Greenspan said…
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets.
We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?”
Later, Greenspan would admit that irrational exuberance was intended to affect stocks, noting, “I was acutely aware of the fact that that particular phrase was put in that speech to spook the market.”
Tech stocks were attracting attention at the time. The tech-heavy NASDAQ 100 Index had more than doubled in two years as Greenspan walked to the podium that night. And that was just the beginning. By the time the index topped more than three years later, it had gained another 498%.
Greenspan was right in 1996. Stocks were more overvalued then than they had been at any time since 1929. History tells us that they became even more overvalued. Less than six years after his speech, Greenspan was proven right. In October 2002, Invesco QQQ Trust (NASDAQ: QQQ) was at the same level it was at in December 1996. But investors had endured a volatile six years.
Where Do We Stand Today?
While this is likely similar to the current market environment, we don’t know whether it is 1996, 1998, or 2000. In other words, while we know stocks are overvalued, we don’t know which stage of the blowoff top we are in.
That’s why, in this environment, a focus on the shorter-term outlook is useful. By making quick trades with the strategies I use, we’re able to still benefit from the bull market while protecting ourselves against the inevitable move down.
My Income Trader Volatility (ITV) indicator is not giving a clear signal on the chart of SPDR S&P 500 ETF (NYSE: SPY) below. The indicator, shown by the red line in the bottom panel of the chart, has been nearly equal to its moving average (blue line) this week. ITV is similar to VIX in that it rises as prices fall. While we don’t have an obvious move one way or the other this week, if ITV crosses above its MA, a decline in price is likely.
Our last chart this week shows my Profit Amplifier Momentum (PAM), which continues to show a bearish divergence. PAM is shown by the red and green bars in the bottom panel of the SPY daily chart below.
PAM is designed as a short-term indicator. It failed to make a new high as prices moved up. This pattern is often followed by falling prices.
Action To Take
My indicators are leaning to the bearish side. But this could just be warning of a short-term pullback within a longer-term uptrend. Regardless, my subscribers and I are continuing to profit from short-term trades and I expect that to be the case in any market environment.
One strategy I use regularly involves a short-term trading approach that offers significant income potential. It allows us to get paid instantly, rather than simply sitting on the stock and hoping it will rise. You can think of it like getting a “P.I.N.” code from me and my team – you simply go to your broker, enter the information, and get paid.
There are more details to learn, of course. But it’s easy to learn, and I’m convinced it will completely change the way you think about generating income in the market.