Market Update: Too Big To Fall?

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In 2008 the banks were Too Big To Fail. Here in 2020, the stock market looks Too Big To Fall.

So much of the status quo is now dependent on ever-higher asset prices that any weakness is immediately met with overwhelming support by the central banks and/or national legislatures.

Many are now wondering: will stocks ever be allowed to drop again?

While that question sound facetious, it’s not. After a decade+ epic run-up in the markets, capped by the past year-long melt-up to levels of price over-valuation never seen before in history, there are practically no bears left on Wall Street. Having been burned for so long, they can’t afford to remain contrarian.

Everyone is now on the same side (long, baby, long) of the boat:

<img class=“aligncenter wp-image-579130 size-full” src=“https://peakprosperity.com/wp-content/uploads/2021/09/Screen-Shot-2020-08-21-at-10.10.05-AM.png” alt="“S&P 500 short interest chart” width=“946” height=“782” />

Of course, it’s at lopsided moments like this when major reversals catch everyone by surprise, warns this week’s guest expert and master technical analyst, Sven Henrich.

Sven regards the markets today as nothing less than a “circus” where a never-ending parade of distractions and rumors serve to divert our attention from the underlying horrible technicals and anaemic fundamentals.

In the video below, he walks us through the key technical indicators he’s tracking mostly closely right now that suggest a massive reversion to the mean from today’s distorted highs is a major risk. Can things still go higher from here? Absolutely – but unlikely for much longer, especially with such a contentious US presidential election looming.

For Sven, the future is all about calculated risk/reward probabilities. And he sure sees a lot more risks right now for investors than he does continued upside return:

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We recommend you do so in partnership with a professional financial advisor who understands the macro risks to the market that we discuss on this website. If you’ve already got one, great.

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This is a companion discussion topic for the original entry at https://peakprosperity.com/market-update-too-big-to-fall/

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Hi Adam,
 
Could you talk about diversifying ones cash to Swiss francs, in case the dollar and/or the Euro collaps ?

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Interesting video. I think everyone, even the market “fanboys”, agree that: 1. We are in a historic bubble. 2. It cannot go on forever.
Sven believes the Fed is “the” dominate player behind the bubble. Everyone agrees. The question is: Is there perhaps another factor effecting this bubble? That would help us make more sense of what’s happening?
Mike Green has a model that predicts what we are seeing today. That investors and the Fed aren’t just blind, stupid, and greedy. Rather: we have now reached the threshold where index fund buyers have reached 40% of all stock purchases (often through auto-paycheck withdrawal). Hence, the 500 stocks in the S&P just keep on auto-growing month after month based on a single algorithm: did you give me cash? If so, buy! Now, since nearly half of stock buyers doesn’t perform any stock analysis at all, the index relies on a smaller and smaller group of real, actual humans looking at performance or the economy. If these real investors exit, but they don’t have the numbers to drop the market, so they have to soon get back in. Real people (like Sven) are merely overwhelmed by the index fund auto-buyers, so a feedback loop is created, causing the big stocks in the the index to get bigger and bigger, and all the other plays get smaller. Green’s model shows exactly what we see. It’s predictable, even expected.
In the video, Sven was perplexed at the bubble size and composition. So he blames the Fed. Yet this is exactly what should happen in the years before the majority of Boomers in index funds start pulling their retirement. Due to low interest rates, everyone, even old people, are still in a lot of stocks longer than expected and now we’ve reached a threshold level of index fund. The rest of the factors, including the Fed, are helpless: the market will relentlessly grow to an absurd level, and then double from that. it’s nobody’s fault, it’s just an accident of circumstances.
Solution for us small investors: stay in the stock market with very firm stop-losses, which don’t cost anything anymore. Ride the upside, but set an auto-sell-auto-re-buy at your original sell-level. We may be days or years from the end of this bubble. There is no risk. The real risk is being outside the market, since the bubble will warp wages, housing, and inflation (it already has).
Mostly: let go of the moral angst. This may just be a machine-driven bubble, one that cannot be timed or controlled. So it will march forward to absurd levels, and then double from there. We may not even be close, we may be a day away. The Fed is likely helpless and trapped; all they can do is crash it, they can’t control it.

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isn’t peoples money going automatically into stocks via their 401k’s. is 401k lie super in australia where 10% of you wage automatically goes into super

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My value stocks were weak this week; my technology mutual funds kept bubbling ahead. Shucks! Unfortunately, all stocks are not going higher and buying and selling makes a market. At least , I have dividends from those stocks to look forward to. I will be honest, we are not in a bubble today but I bet you, we will be by 2028. I suggest that we are in the “millennial bull market” and it will be driven by what millennials do. Us old folks, we are just along for the ride. Thank you for the interesting article.

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I had hoped to squeeze this image into the video, but the chance just didn’t come up.
Painful, but so true right now!

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In the Mid 80’s I was a red hot options trader. Could do no wrong. Back then we had real life Stock Brokers and I remember clearly the “Old Fogie” warning me that anyone can look like a genius in a bull market. What would he know. Anyway in October 1987 I’d learnt the lesson he was trying to impart as my “stock portfolio” went to $0 when the market opened. No stops would have helped. The good thing was (as I was only 20 at the time), it was not a lot of money to learn a great lesson.
Unfortunately, we tend to learn through experience. It’s this generations turn.

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And folks who bought that Tuesday morning did quite well. And 2002 and 2009, and last March.

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In the Mid 80's I was a red hot options trader. Could do no wrong. Back then we had real life Stock Brokers and I remember clearly the "Old Fogie" warning me that anyone can look like a genius in a bull market. What would he know. Anyway in October 1987 I'd learnt the lesson he was trying to impart as my "stock portfolio" went to $0 when the market opened. No stops would have helped.
If you buy large cap stocks (held by millions of investors and literally hundreds of institutional investors) they are highly liquid and having a stop loss fail due to a rapid loss is less likely than dying of lightning. It never happened in any other crash. Speaking of taking the advice of Old Fogies/stop losses? I had an inverse experience in the tech bubble when I was a kid. My boss made $10+ million from ~$1 million (this was "play money" for him) in just a few years by investing in larger cap tech stocks with basically zero risk using stop losses. When that insane bubble finally did crash (with a bang!), he made literally millions. I remember him well, because he was working "for fun" (he could have retired years ago) while I, ignoring his wisdom, protested he was going to some how get trapped; he laughed at me like the fool I was. Wish I would have listened to his wisdom. These kinds of bubbles with large cap stocks simply don't come around only very often and I won't waste it again. It's been great for 10 years so far but the tail of this bubble could get twice as high in months this time.
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Great interview Adam. I’m a big fan of Sven because he does detailed work. Thanks again.

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https://youtu.be/sMwg6fqseP0
 
He starts off explaining how shifting to passive is effecting markets. He goes through the math in a really simplistic manner in the 5 to 11 minute marks. He then takes it from present day where he shows markets are about 2x over valued do to passive currently and would go up 20x from here if we got 90 percent passive. This is a structural change that has been legislated for the most part. Corporate HR departments are becoming fiduciaries that must choose low fee passive funds.

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The equity markets today feel a lot like they did during the dot com era in late 1999 to early 2000. Markets mean revert, and as Adam has pointed out, value is over due. Remember that outperforming growth stocks may simply mean losing less.
Should Value Stocks Be On Investors Radar For 2020? - See It Market

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The equity markets today feel a lot like they did during the dot com in 2000. Markets mean revert/value is over due.
I'm a value investor. Bluntly "value" was overdue ~30 years ago! Due to regulatory/demographic/immigration/political factors, stocks are and have been un-moored from traditional "value" for most of my life. But where else to go? I'm not into the blame game, but the reality is that the game is rigged. One must participate in the game as it is, not as one wishes it to be. This is and has been a 'Hotel California' market for the unaware stock investor. But one must 'check in', to stay out is not really an option, as we've seen in the last 10 years with rapid inflation in all assets. One is forced to play in stocks due to TINA. Sure, it's tough to get out quickly when it collapses overnight, just like one had to be paying attention in 2000 & 2008. But there is no easy alternative solution: don't fantasize PM has no risks either, since in a major crisis gold and even silver may well be restricted/taxed, even confiscated like PM was before. How to minimize the risk? 1. Own individual, blue-chip, large-cap liquid stocks (ease of sale and preserves wealth in a downturn; large profitable stocks with real value (read: dividends & book value) may even go up in the crash as people pile out of tech...but they still rise nicely these bull markets 2. Use stop-losses with respectful limits on every stock to get out with time to spare before the flash part of the crash. 3. Buy only stocks that have value on their down-cycle (again using auto-buys) to ensure you have a high floor. 4. Keep 10% PM in your physical possession, but never be naive: there is no "safe place". “If everybody indexed, the only word you could use is chaos, catastrophe...The markets would fail.” – John Bogle, May 2017
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…I find your weekly Podcast to have been where I go to get the other side of the story or more of the story. Sven is awesome. and I find I learn a lot for what I take from your Podcasts. You have put up some great interviews a broad spectrum of people I follow myself. Every week I painfully read and learn from those who think in dire tones about the market, it helps with my biases and keeps me grounded. I am not a person that isn’t afraid to risk it all or to get out of the market in an instant just based on my gut. I do this as a lifetime adventure so one day, week or month isn’t a bother if I sit the market out. Like Oct. and Nov., I have no issues being out just from a historical perspective but, then I do like the Santa rally as it is a beautiful time to experience some cash especially if a correction just proceeded it and I was out.
My go to guy among others is Tom Lee, the Man has been incredibly right for quite some time and we think along the same lines. I have ridden his coat tails for some time and have benefitted. So many terrific and intelligent folks out there to advise us if we do the work and read from everyone, Pro’s and Con’s. I will not let my biases be so stringent that I don’t see the forest before the trees.
Further, I remember well the years following the Financial Crisis and you could put our conversations and dire outlooks into this time as well and nothing happened but time to get everything done that needed to be done. So, we cannot forget that lesson either. This time is no different than that time, or is it?! I guess we could stay into a state of fear or we move as best we can through these times and stay atop of our due diligence and trust that hard work is an important part of being successful. The data is a tell but I haven’t yet seen data that is real and decisive and no one else has either. In saying this however it does boggle the mind to see all time highs when we are in a severe Recession. It’s counter intuitive but then we just experienced the Financial Crisis and we didn’t crash and burn. It would be easy to go ultra conservative as I did after the crisis of 08 but then I lost a great opportunity to make some serious make up cash. I changed my course and was glad I did. This time around I have benefitted from the very start what the Fed has done and all because I learned then that this is a massive economy, that can be manipulated and a very fine living could be made of it. It’s hard to turn a blinds eye to what the Fed did so they have at the very least proven to me it isn’t over until its over. Time will tell and getting out would not be hard at all, I could miss out on a huge move but I already have what I need but, I want more because part of doing what I’m doing is the rush I get when I’m fearful but stay the course and it pays me back that risk factor.
I am just super charged right now, have a risk tolerance and can handle the things I do because I can live with myself the decision I make for our lives. So far so good.
Keep these terrific Podcasts coming and everything else you expertly put up on this site. I am always better prepared after visiting this Peak Prosperity site.
The work you two did regarding the Virus has been professional, Seminole, insightful and I’m proud of you both. You did one helluva job during this on going Corvid 19 crisis. You saved lives, prepared and taught us great lessons and we are all in your debt for this. Regards BOB
Good luck to you Adam, and I must compliment you your work ethic: my God, you put all you have into every day you work on your site. I am impressed with everything you accomplish on behalf of all of us. Two things I respect above all others: a Man’s character and work ethic, you exceed in both. Thank you…Peace