02 Dec 2nd December 2024
Weekly Index Movement
| S&P500 | +1.1% |
| Nasdaq | +0.7% |
| Aussie All Ords | +0.7% |
There wasn’t much happening last week and nothing of note to really talk about so this week I’m going to dedicate the Catch-Up to thinking about how we might spot a top in the market before it is too late.
One classic sign is the fabled “shoeshine boy indicator”. According to legend, Joe Kennedy Snr (Father of RFK) sold everything just ahead of the massive 1929 crash because the man shining his shoes started giving him stock tips. He argued, correctly as it turned out, that if social interest in the stock market was extremely elevated, then it was time to get out.
This is also known as a contrarian indicator.
Where are we now on this? Well, the AAII investor sentiment survey is far from a top in bullishness
By this measure we can say the bull market has room to run further.
I can’t say the same thing for crypto-currency though. We are taking orders every day from people wanting to buy into crypto. Bitcoin has done around 50% since Trump got in. So now all the crypto bulls are coming out of the closet. I keep getting told that crypto is going to $1,000,000. Funny that no-one was telling me that when it was languishing in the $60,000s.
The crypto shoe shine boys are certainly out in force. Be careful if you operate in this world. It could all come crashing down just as fast as it went up.
Number two on the list is the number of IPOs
From 1995-1998, the US IPO market was in the range $28-$34 billion/year. In 1999 it suddenly increased to $65billion. The stock market peaked in March 2002 and entered a 3 year bear market.
In 2018-2019 IPOs ran at $33-$39billion/year. In 2020 IPOs were $62billion. In 2021 the total was $119billion. The S&P500 was down 18% the next year.
Where are we now?
Year to date 2024 IPOs are at $29billion. Last year was $19billion. It seems the trigger to watch in the past was a doubling or more. So the IPO market is saying we are not at a top yet
If you are wondering why an IPO market might signal a top…..A top happens when stock market fever is at its highest. IPOs are generally a risky investment because the company is newly trading. When investors are buying huge amount of risky investments, it means buying fever is high. Markets do not top because of sellers. Markets top out because we run out of buyers. Every day the market heads higher is because the buyers were more desperate than the sellers. But every buy reduces the pool of who wants to buy. Eventually that pool is so small stocks are not able to advance. That’s when the sellers pounce. Then you get all those people who bought changing sides to sellers, the sellers pool is huge and everyone rushes for the door at the same time due to the universal fear of loss.
Our last one will be outsized gains for US tech stocks. This is a similar concept to the IPO market but applied to large cap Tech. Yes, I know you think large cap Tech is overvalued, but I am going to show you this is not the case. At least, not yet.
The chart below shows the Nasdaq’s annual return by month from 1972.
The long run average return is 12.8percent. 2 standard deviations (statistical significance) above this is about 60 percent. Rallies to this level have a tendency of fading or, if a recession hits, turning into bear markets.
The good news is the Nasdaq is only up 35% over the year, a good distance from the 60% warning level.
On the topic here of tops and fear of bear markets. Trump.
I am hearing a lot about how unpredictable Trump is and how he is going to plunge the world into chaos. Ummmmm…..not if his first term is anything to go by.
During the first year of Trump 1.0, 2017, the average for the VIX was 11.1. The long run average is 19.7 so Trump 1.0 was a statistically significant low volatility period. The VIX made a record closing low of 9.14 in Novemember 2017 and has never been lower since. Of the 50 lowest VIX readings ever, 90% of them occurred during Trump 1.0.
(for those that don’t know the VIX is a measure of volatility and uncertainty. We option traders watch it all the time and it has become a useful tool for me to pick good times to buy stocks)
Far from being unpredictable, Trump 1.0 led to very stable and consistent stock market gains.
About the only thing I do worry about at the moment is interest rates. An uptick in inflation and talk of a rate rise would really unsettle the stock market. But there are no signs of that at present. In fact, US inflation came in at +2.8% last week so maybe I should stop worrying about it.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.