► When it comes down to it, it's really hard not to see the massive financial bubble we're living in...
Don't forget about the current valuation of the benchmark S&P 500 Index. As I've noted numerous times over the past year or so, it's more expensive than it has been in history... at slightly more than 3 times sales. (The dot-com bubble peaked at 2.3 times sales.)
And just look at the average investor's desire to dump money into the market these days... The "meme stocks" are all the proof you need. We'll dive deeper into this whole idea today.
It's like watching an amateur poker player smile at his hand and push all his chips to the middle of the table after he was just baited by one of the world's greatest "sharks"... He thinks he's about to win, but you and everyone else knows he's about to lose.
Stocks, bonds, commodities... investors are "all in" right now. No wonder flows into mutual funds and exchange-traded funds could be on pace to make the past 20 years look tame.
And the effect on the overall mood of investors is palpable...
We'll focus on the stock market, since investors are most in love with that particular asset today...
We can confirm that idea by looking at TD Ameritrade's Investor Movement Index ("IMX"). According to the online brokerage firm's website...
The IMX is a proprietary, behavior-based index created by TD Ameritrade designed to indicate the sentiment of individual investors' portfolios. It measures what investors are actually doing, and how they are actually positioned in the markets.
The IMX does this by using data including holdings/positions, trading activity, and other data from a sample of our 11 million funded client accounts.
The IMX reached 9.08 at the end of June – its highest reading since its January 2010 inception. The previous peak was 8.59 in December 2017. That time, the S&P 500 peaked about nine months later... and then fell roughly 20% through Christmas Eve in 2018.
Both peaks have been dramatic events, with sentiment bouncing off multiyear lows less than two years prior. Take a look...
A random sampling of clients from one of the largest online brokerage firms strikes me as a great place to find out what individual investors are doing and how they're feeling. And...
They're in a better mood than at any other time during the longest bull market in history.
People buy when they feel good... They feel good because stocks have gone up... Stocks go up because folks are bidding them higher.
Around and around it goes... where it stops, nobody knows.
This isn't about calling the top or predicting when this unprecedented good mood from investors will end. It's about noticing that... nobody is worried about it.
In fact, despite this being the most expensive market on record, individuals are just sitting around thinking about all the money they're going to make starting right now... and continuing indefinitely – if not forever. They all seem to think the good times will never end.
But maybe I'm being too dismissive of the herd of individual investors...
Maybe they're all really geniuses.
For example, maybe buying left-for-dead companies like movie-theater chain AMC Entertainment (AMC) and video-game retailer GameStop (GME) was such a genius move that a simple fool like me just can't ever hope to understand how brilliant it truly was.
And if they're all geniuses, then maybe I'm making too much out of the widespread financial speculation we're seeing... The market is filled with speculators every single day, year after year. Speculation is normal. A lot of people speculating doesn't mean we're in a bubble.
That's correct... Speculation is so common in financial markets that it's barely worth noting. Increased speculation doesn't automatically indicate a bubble. That's true... almost all the time. But like any discussion of the overall market... it's a different story at the extremes.
I believe the current speculative mood is too extreme...
There's simply no way this is anything other than a bubble. Veteran Wall Street analyst Richard Bernstein agrees. He recently explained how you can tell it's a bubble...
The difference between mere speculation and financial bubbles is [that] speculation resides within the financial markets, but bubbles pervade society. Today, financial speculation is clearly pervading society.
Here's an example that I saw recently. It comes from the Twitter account of Genevieve Roch-Decter, a chartered financial analyst and money manager...
It's one thing when you can't escape options trading pitches on financial websites... It's a completely different ballgame when you can't escape them when driving along the road.
Bernstein uses another phrase to describe a different aspect of the same pervasiveness of financial market speculation in our society... It's one of the five criteria he uses to determine if we're in a bubble – increases in liquidity, leverage, initial public offerings, trading activity, and the "democratization of the market." Last Friday, I said you could see the last one in "meme stock" short squeezes and rising speculative call-option buying.
Perhaps we'll deal with the other four another day, as the bubble rolls on. For now, "democratization" is a two-bit word that means anybody can participate...
Democratization of the market... speculation pervading society... or whatever else you want to call it... it's clear that individual investors are wielding power they haven't had since the height of the dot-com bubble.
They're back and they're bullish!
Think about AMC for a minute...
There is no rational reason for AMC – perhaps the No. 1 meme stock of all, even surpassing GameStop these days – to continue to be valued in the stock market at nearly $20 billion.
The business was in secular decline for at least a decade even before COVID-19 lockdowns shut movie theaters down for the better part of 2020. Then, the company lost 80% of its revenue in the lockdown. It'll never get all that money back. Its business is doomed.
Nobody buying AMC's stock today has the slightest clue what they're doing. Yet to the herd, it looks like it got things right on AMC... so they can't imagine not getting it right.
Their stellar results so far – and the accompanying euphoric sentiment – have set these folks up for huge losses.
The more AMC stays elevated, the more investors will try to justify a clearly unjustifiable market valuation... and they'll be less likely to dismiss the high valuation as the effect of the fully "democratized" bubble market they and their ilk have created.
All the evidence that counts is on the AMC bulls' side... The stock is way up. People who bought the company's shares have made a lot of money. People who didn't buy failed to make a huge sum of money very quickly. And those who sold the stock short got crushed.
What other evidence do you need? What other evidence exists? None that anyone cares to consider.
Now, multiply all of the above discussion by thousands of stocks in the most expensive market in history... As you can see, it's a lot bigger of a problem than you might first imagine.
Fools, as it has long been said, are indeed separated, soon or eventually, from their money...
So, alas, are those who, responding to a general mood of optimism, are captured by a sense of their own financial acumen.
But who looks like a fool right now – the folks who've bought every crazy speculation and keep making money as they push the market higher... or bearish investors like me?
I've mostly been bearish on the overall market since 2017.
We've experienced steep corrections since then... But overall, anybody who just kept buying and buying has been right – and bears like me have been wrong.
Still, you'll never catch me trying to time the top of the market... or recommending that you sell all your stocks and go into hiding somewhere.
The stock market just doesn't work that way.
Instead, I'll keep finding attractive equity opportunities for my readers.
Yet, as foolish as it may seem to the vast, hyper-bullish, hyper-optimistic, and at least temporarily wealthy herd of individual investors, I'm still bearish on the overall stock market. And I likely will be until the S&P 500 loses at least 30% (preferably more).
That's when the real value opportunities will arise... And we'll scoop them up hand over fist.
For now, don't sell all your stocks in a panic. But do prepare yourself for a serious stock correction. It might not happen tomorrow or next week... but it always comes eventually.
And when it comes, you'll want to have conviction in your long-term investments...
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August 13, 2021