Peak Greed: Why it Can’t Last

We had to see it to believe it.  And now, well… we’ve seen it.

The Dow is just 130 points from 20,000 – a number once thought unachievable weeks ago.

Will it last without fundamental support, as we’ve seen?

Probably not… But traders don't want to listen, instead believing “this time it’s different.”  Options traders have never been more bullish.  There’s also very little cash on the sidelines.

But as we learned in the crashes of 1929, 2000 and 2008, it’s not different at all.

There is no fundamental support for Dow 20,000, as we explained here, too.

We’re at peak euphoria.

Not only is cyclically adjusted P/E (CAPE) – a metric created by Robert Shiller – at a 1929, 2000 and 2008 high, but we’re seeing other oddities.  If we look at Relative Strength dating back to 1995, stocks fell at least 5% within days of where it stands today.

With RSI at 86.7, we’re at an unsustainable high, coupled with MACD at 321.

Yet, traders are more bullish than they have ever been.  It reminds me of the euphoria we saw in the crashes of 1929, 2000 and 2008.

Also, the Dow has only been more overbought that it is now four times over the last 100 years based on RSI alone, reminding me of an old Warren Buffett statement.

“Be fearful when others are greedy, and greedy when others are fearful.”

A lot of money could be lost when the bubble deflates, just as we saw in 1999, too.

In 1999, the Dow sank from about 3,000 to 2,350 in weeks on a similar set of circumstances that we’re seeing now.

The Fed was raising interest rates with concerns of inflationary pressure.  Investors were also pushing asset prices higher on expectations for a long, sustainable economic growth.  And every one forgot that excessive optimism eventually reverts to mean.

What we’re also forgetting at the moment is that the economy is still weak.  The labor market has not improved as much as the talking heads would have you believe.  Monetary policy is strengthening.  And wages have not improved greatly.

While we’d much rather jump on the bullish bandwagon, many traders are putting the cart before the horse. We have to be realistic here.

The fundamentals do not support Dow 20,000.

You have to be aware of that.

Or we’re failing to keep you safe.