With most of the major stock indices making new highs, it’s tough to argue against the bullish case for equities, particularly if you’re a long-term investor, and I’m not going to do that here, well maybe a little. For the short- term income trader (those that trade for money they can spend today) the stock index futures market provides ample opportunities both on the long and short side as the market never goes up in a linear fashion. Most of what this article has to do with is longer term time frames.
In the many years I’ve being involved in market speculation, one theme that always seems to surface when the markets experience a protracted bull run —as has been the case for the equities market over the last 5 years— is the notion that this particular bull market is somehow different than all the others. The inference being that this particular bull market can keep going longer than all the previous ones. In other words “this time it’s different” so there’s nothing to be worried about. I remember hearing these words in late 1999 in the midst one of the biggest stock market bubbles in history, and we all know how that movie ended. Now, I’m not suggesting the we’re in a bubble today, however if you have been paying attention lately, many of the recent companies that have been issuing stock to the public (IPO’s) have been lacking in profitability which is a hallmark of excessive speculative fervor. In addition, margin debt (money borrowed to purchase stock) according to the New York Stock Exchange is at record level. These are just a few pieces of data that might be early indicators of trouble, just food for thought.
In 2007, at the height of the real Estate bubble, I remember having a conversation with a friend of mine that just happened to be a Real Estate Broker and him telling me that the Real Estate market in California could never go down. He then proceeded to list all the reasons why his thesis was foolproof, and of course, we know how that turned out.
My point is that this type of thinking can be dangerous as it blinds us from the objectivity that we must always maintain in order to anticipate the turning points in the market. The reality is that the markets throw off plenty of warning signs before they start falling in earnest. The problem is that most investors, either ignore or dismiss these warning signs altogether. Only after it’s too late will they tend to take action, that’s just human psychology at work. We must remember that our natural human tendencies always get us in trouble when it comes to trading. What this tells us is that we need to change the way we think in order to change our results, and part of that change in mindset is to be proactive instead of reactive when looking at financial markets. This sometimes involves going against the grain of mainstream thinking. This can be hard for many folks. Believe me, it’s not easy being a contrarian, but it can be fun, and more importantly, profitable.
So, no, this time is not any different than all the others. When the turn comes, traders that buy high will lose and those that sell will avoid losing. Those that short in low-risk supply zones with a high profit margin will do well and the majority will lament why they didn’t see it coming. We mustn’t forget that markets never change; it’s we as traders and investors that must change.
Until next time, I hope everyone has a great week.