There is a buzz around markets these days, many are in complete disbelief or denial that the bull market continues to rage on. The length of this run is now about nine years, and we have barely had any correction. That is not to say we won't have one coming, and certainly with the bias toward short volatility (skew, tail risk) and short S&P 500 put futures and other products there will be an unwind that will feel monumental.
There is likely no getting around it, and it is certainly smart to be prepared for such and event. Just don't put an enormous amount of capital at risk in these low probability plays. For months, many have made a living selling volatility in the face of market making new all time highs. As a momentum trader, I feed off this confidence and sentiment along with the low implied correlation, which creates a stock picker's market. But this strategy will fail at some point, but should we listen to the crowing about it now?
From a fundamental perspective, earnings have been stellar this year, boosting values of companies. Jobs growth has been strong for over seven years as the good work from the previous administration and the Fed mandate has underpinned the good growth. Earnings will be a put option under the market until they peak. When that happens, who knows but the current earnings growth cycle is early. Productivity levels are poor which is the main reason why our economy is not above 3% GDP, while rollbacks of prior regulatory reform has been very helpful for companies to continue producing strong profit growth.
The market will tell you everything you need to know. The skinny: markets are mildly overbought currently, some indicators like the put/call, breadth and slightly oversold while the VIX is downtrodden (too bullish). This mixture of indicators however defaults to the SPX chart, which is solidly bullish, the Dow Jones Industrial Average even more so. This is the most important information you need to know: this is still a bull market, and play it accordingly.
Yet, in the media we are hearing and reading more dire warnings. Some even joke about it and make fun of those who are still in the game, wondering why and saying they will get their comeuppance, just wait and see. Many are dumbfounded by the action each day, with the hope or expectation the markets will fall, and when they don't find convenient excuses (like an invisible hand). From an investing perspective and those with a long term horizon, there has hardly ever been a reason to time the market. Just staying in and adding more when markets dip has been an enormous wealth creator. Stick to that disciplined approach.
These warnings are often from people trying make a name for themselves and 'call their shot' as Babe Ruth once did nearly a century ago. Go down in history (or many years) as being more prescient than Nostradamus, cementing a place in market history as someone whose advice would be considered trustworthy. John Paulson got paid bigtime shorting mortgages in 2007/09, made a name for himself. His results since? Poor at best, so is that someone you wanted to invest with? And today, with seemingly everyone watching markets, the audience is large enough that any call that is close is going to get someone's attention.
So that brings us to the constant chatter, which eventually just becomes a joke (even to the deliverer). Some recent articles I've seen passed on include those comparisons to the 1987 crash, that we need to be prepared for it. How many market crashes of that size since? Zero. Yet, there are more derivative products and potential risks out there, yet we have not seen the Dow Industrials fall 22.6% in a day. A 500 point drop today may sting, but that would be less than 2.7%. I can see the similarities of conditions, complacency and skew bets but the size and magnitude are just not comparable. We still have orderly markets.
The stock market today has been built on earnings, value and some fluff (there are always some bubbles out there, we just don't have large ones today). To just flat out say the markets will do 'this or that' is nice conversation but not something to take all that seriously. While it's good to have historical perspective in your mind, rational thinking, common sense and good up to date information are far more valuable analysis tools.
Many point to the weak economy, the market highs are not legitimate to support such slow growth. Yet, was the stock market so UNDERVALUED after the financial crisis that after many 2% yearly gains the markets finally caught up to the economy? Hardly so, these two are connected at all times, as the stock market reflects the economy six to eight months out. There are very few surprises other than the occasional shocks, which are often adjusted for right away.
We hear funny one liners, see tweets calling market action a joke, some say the market is just 'dead' (not really), and the continued warnings day in and day out of what is to come. Take it with a grain of salt but as we always say, listen to the message of the markets - it'll tell you all you need to know.