Is This a Bubble About to Pop or a New Bull Market?
The S&P 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.#-ad_banner-#
Stocks Are Bullish, but Not Bubbly
After gaining 0.42% last week, SPDR S&P 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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