It seems nothing can stop this market.
The bull keeps charging. Buyers step up on even the smallest decline. And, this momentum fueled market keeps pressing higher.
Strong stocks get stronger. Weak stocks get weaker. The proverbial rubber bands keep stretching.
Momentum, though, has a habit of ending abruptly. So, while it feels foolish to stay on the sidelines while hot stocks get even hotter, ultimately… the rubber band always snaps back.
Timing that move, though, is challenging.
When traditional indicators reach levels that have previously led to reversals, yet no reversal happens, we tend to think there’s a problem with the indicator. Or, we conclude it doesn’t work anymore – that we’ve entered a new paradigm. We then look for reasons to justify the momentum.
Think back to the dot-com melt up market of 2000/2001. We couldn’t explain the momentum using traditional methods – like price/earnings ratios, book value, dividend yield, etc. – so we turned to “page views” and “eyeballs” to justify paying high prices for stocks.
You may recall the famous “Buffett Indicator” – which is the value of all stocks divided by the US GDP (gross domestic product) – approached 200% back in 2000. Warren Buffett pointed out that it’s usually a bad idea to be buying stocks as that ratio approaches 200% – and he was ridiculed for saying it.
Then the momentum died, and stocks collapsed.
In November 2021, the Buffett Indicator once again got close to 200%. Folks argued it didn’t matter. Interest rates were low enough to justify buying stocks, SPACs, ICOs, private placements, etc. at crazy valuations.
Then the momentum died, and stocks collapsed.
Today, the Buffett Indicator is at 208% – surpassing the highs in 2000 and 2021. It is the highest it has ever been.
The stock market is also the highest it has ever been. Folks justify it by arguing that AI is a game changer. DOGE is a game changer. President Trump is a game changer. Etc.
At the moment, momentum is ruling the day. As I wrote earlier though, momentum has a habit of ending abruptly.
There is a reason some of the biggest players on Wall Street are holding the largest amount of cash they’ve ever had.
It feels foolish to be holding cash right now. But, it will feel pretty good when the rubber band snaps back and we can put that cash to work at lower levels.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
Free Trading Resources
Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just go here to check it out.