Outlook for 2018: Curb your enthusiasm

Unless something happens by end the end of the year, 2017 will be characterized as a one way upward street. The biggest corrections we saw were about 3% and there weren't many of them. I've read many market outlooks from the major investment firms and the consensus view is one of optimism and somewhat complacency. They are basically saying this:

"the markets should benefit from global synchronized growth with international markets, Emerging Markets, being the more attractive. There is little risk of recession as the yield curve is not inverted. The major risk is that the fed ends up tightening more than expected if inflation flares up".

Last year at the time, the consensus from these "experts" was far more cautious as there was concerns about political risks and valuations. Those concerns aren't as prevalent today, yet I would say now would be the time to be more concerned about political risk and valuation! Instead I have seen more strategists justifying current valuations saying that they are fair given interest rates or some other reason. Remember all the hoopla about the high CAPE ratio? Seems like this is being more ignored now (but not entirely).

As a bull market rise in stocks or any asset class (such as bitcoin which I will discuss shortly) progresses it's not surprising to see people make justifications for it as they finally throw in their bearish towel and embrace it. Towards the end of a bull run the gains will accelerate and so too do the justifications which at that point become very weak. I've said before many times that this has been the most hated bull market I have ever seen.... I am now seeing some love for this market...but it only took 9 years! Where the fuck were all you bullish strategists when the S&P was at 1400? lol 

So, now that there appears to be optimism and quite frankly some complacency heading into 2018 does this mean the end of the bull market is nigh? Well, like I said before, euphoria/complacency and tight money is the killer of bull markets. What we are seeing now can be categorized more as optimism with a splash of complacency, but money is not yet tight as the yield curve is not inverted. However, I will say this, I'm seeing that the "experts" have also been pointing to the non-inverted yield curve as a reason to remain bullish and that makes me uncomfortable.  Again, where the fuck were all of you in 2011, 2012, 2013, 2014, 2015, 2016 ? How come no mention of the yield curve then?  Remember the motto of this blog. If too many people become complacent because of the yield curve or for some other reasons, the market will find a way to surprise and punish the masses. Either that indicator won't work this time or there will be some other unexpected thing that happens. I remember in 2001 when the fed did a surprise interest rate cut there was all this bullish hoopla because of a statistic which showed that the market was always up every time 12 months after the fed cuts interest rates - except for 1929. Well, guess where was the market was 12 months later....  

So, here's what I feel. I still believe the bull market is in tact but I'm a lot more cautious than I have been in some time and I won't hesitate to change my stance depending on how things unfold. I believe there is a very high chance of a major correction in the first half 2018 to wring out the complacency I see right now. If the market simply keeps on chugging along then we would likely enter the euphoria/ blow off phase of this bull market.

Speaking of euphoria, let's switch to bitcoin and cryptocurrencies. This is a classic bubble which is so crystal clear to me having witnessed other bubbles: The parabolic rise in prices, the hundreds of spin off coins that have popped up,  adding "blockchain" to your company name or any involvement in blockchain results in  an instant 300%+ gain in the stock price, all the mainstream media attention with celebrities like Katy Perry asking about it (dumb money),  the inquiries I'm getting from friends and co-workers (dumb money), reports of people borrowing money to buy bitcoin, outlandish forecasts for much higher prices after prices have already skyrocketed. These are all major red flags, and this will clearly end badly. Yes, I know many skeptics were calling bitcoin a bubble when it was at a much lower price and they got made to look foolish, but the same thing happened with the dot com skeptics of 1999 - they were right, but early. Bitcoin is 100% in a bubble and I think there's a good chance that it has already began to implode.  I lived through the dot com bust and I will say it again, all the signs for a peak to this frenzy are there and all manias end BADLY. 

If you want to talk about a risk to the market that's not really being discounted I would say it's the implosion of cypto currencies. The fact that there are reports of people borrowing money to buy bitcoin and the introduction of bitcoin futures pose a dangerous threat to the general economy if the mania continues. I'm not sure of the extent of leverage behind bitcoin but it's there and the longer this mania continues the greater the contagion effect will be. We saw that happen with the dot com bust and the sub prime mortgage bust. If the cypto-currency bubble has indeed popped which I think it probably has, it would be for the best as the fallout shouldn't be too bad at this point, but I can't really say that with confidence at this point.... I need to investigate this. 

Is this what the end of the bull market looks like? (probably not)

I know it's been a while and probably nobody follows this blog anymore. I've been busy with a lot of stuff and found it hard to find the time to make posts  and so this post is long overdue. My last post about 10 months ago suggested that you give the bull market the benefit of the doubt for the reasons I've been mentioning here since day 1 which is this: Prior bull markets have ended when most have fully embraced it (i.e. greed/complacency) and when monetary conditions are tight (i..e inverted yield curve). It really has been that simple! They don't end when a certain valuation metric is reached or after a certain number of years as the pundits who have been crying wolf would like you to believe. So, given our definition of what the end looks like can you truly say that people have embraced this bull market? Sure, it's a subjective thing to qualify but I still don't see it. Ask the average guy on the street what he/she feels about the markets or the economy. I bet you will get a response that would range from cautious to luke warm at best and it's been this way for years! And what about monetary conditions? Yes, they are tightening but only starting to tighten from extremely accommodating levels - interest rates are in the process normalizing from all time record lows but they are still quite low and the yield curve is positively sloped. This all suggests the bull market is still in tact.

I will be one to admit that valuations are not attractive and for this reason it's keeping people on edge, that along with Trump being at the helm of the USA, but I remember in 1999 when valuations were also high, people were rationalizing them saying it was the result of a new era (the internet) and so traditional valuation metrics didn't apply. It's that kind of complacency that makes the market vulnerable and we are not seeing that now. So long as people are on edge, there is a wall of worry for the market to climb! This is not to say that you won''t get nasty drops -  you can, and we've seen them happen throughout the recent years, but you must continue to give the bull market the benefit of the doubt when they happen if prior to the drop you did't see greed and tight money. Maybe we are going to get one now with this latest standoff between the US and North Korea. This looks like yet another poor excuse for the market to go down.if you ask me and I doubt this correction will go really deep...it could very well be over already (tough to say). North Korea will do fuck all like it always does...they are like my neighbor's barking dog. Trump may very well be brash and a bully but he's obviously right in that North Korea is totally over matched and would be crushed if they dared to make any type of attack.

So in conclusion I will say that when the markets are "high" it does make it susceptible to corrections and frustrating to find good set ups on the long side but you must to continue to give the bulls the benefit of the doubt until we see greed and tight money. Don't go short and don't get shaken out easily. Keep some cash on hand if that what it takes to make you a strong holder, hedging a bit is Ok too but don't go net short.  There hasn't been a shortage of articles and pundits who have been warning since 2015 about the "aging bull market" and what has the market done? Gone higher and higher and that's not surprising to me given the motto of this blog.