For several months we’ve noted that the US equity market was entering a kind of mania that was indicative of a top forming.
In particular we noted:
1) Investors piling into stock-based mutual funds at a pace not seen since the Tech Bubble.
2) Margin debt (debt investors take on to buy stocks) at a record high.
3) Market leaders (Tesla, Netflix, etc.) showing clear signals of investor rotation.
4) Corporate profit margins at record highs and primed to fall.
5) Market breadth shrinking (meaning fewer stocks participating in the rally).
6) The VIX (a measure of investor sentiment) dropping to levels of complacency not seen since 2007.
7) Investor bullishness hitting record highs and investor bearishness hitting record lows.
8) Investment legends either returning capital to investors (Icahn, Klarman) or sitting on mountains of cash (Buffett).
In simple terms, the bull market of the last five years finally went into mania mode as retail investors stopped worrying about income (investing in bonds) and drank the Fed’s Kool-Aid: bought stocks.
Note, in particular, that the blow off/ mania component of the rally occurred when retail investors began to pile into stocks (as is always the case with tops).
Whether this is just A top, or THE top, remains to be seen.
Let’s see what history has to tell us about manic tops.
In 2007, we had A top followed by a sizable correction… then THE top hit.
Many of the macro drivers in 2007 are in place today (housing bubbling away from median incomes, richly priced equity valuations, excessive leverage in the financial system, etc.).
However, a key difference is that in 2007, the Fed had engaged in several money pumps to the tune of several hundred billion dollars and had only just begun cutting interest rates.
Today, the Fed has spent over $3 TRILLLON and kept interest rates at zero for some five years. Monetary policy will not be nearly as flexible should the markets form a MAJOR top today.
This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://phoenixcapitalmarketing.com/special-reports.html [7].
This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.
Best Regards
Phoenix Capital Research