The market is now entering a new era. Back in October 2022, when I called the bottom, it was an easy pick. You could pick any tech stock, and today you would be a winner. Yes, the traditional stocks were the laggards, but since then, they have picked up the steam and rallied as well. But today, the valuation is a problem once again and the market is overbought.

During the days when bears were all around predicting the end of the world, I was buying shares of Apple, Amazon, Google, and other tech stocks. I wish I had more cash to buy more of these stocks. Bears were raging, I was buying. Now the bears are turning into bulls, chasing the stocks that are now expensive again, and I am sitting on large gains. My Apple position is at 69% gain, Amazon at 52%, Google at 14.7%, SNOW at 1,132%, SPXL at 111.7%, and MSFT at 37.8%. And these stocks are no longer cheap. Former bears are chasing them, I keep sitting tight and creating cash reserves. Cash and gains preservation is the key now.

My problem was that I was buying on margin. And during the bear market, the margin was shrinking fast. And although I had almost $40,000 in cash, I needed more. I invested during the bear market and increased my stock holdings by 40%. This effort will pay off later in the future. In dividend income, it is already paying off. In 2022 the dividend income doubled (it went from $2,785 to $5,868 annual income). But it took a lot of work. I constantly ran out of buying power despite holding $40,000 in cash. I raged at my broker and their Apex clearing firm for increasing the buying power maintenance and ruining my path to millions. But then I realized that a $200k portfolio needed more cash to cover margin requirements during the bear markets.

So I am now advocating for cash preservation. Cash is king now that the market is overbought and there is still a risk that we may see a recession.

I do not think this market will crash. We are in a secular bull market that will last another 10+ years. But that doesn’t mean we will see a smooth straight rally. There will be volatility. We will see pullbacks, corrections, or bear markets on the way up. And the portfolio must survive these pulses. In 2022, I was trying to buy depressed stocks, but then when the market dropped again, I was forced to sell them (my biggest regret was Netflix when I bought it below $200 a share but was forced to get rid of it later due to a margin call. Today it trades at $400+ a share! It is now late to be buying). I realized that to survive, I must double my cash reserves.

When the markets are falling, buy hated stocks; when the markets are rallying, save the cash for the time when the markets turn around again. Preservation is the key. And today, it is time for preservation!
 
 

Last week the markets rallied as I expected but many investors were pointing out that this rally is fake, bear market bounce, and that only a few big tech companies participate in this rally and thus the market is in fact doomed. And they may be somewhat correct but only in one fact – the market is propped by a few big techs only and the rest lags. The best way to view this is to look at the market’s breath (the ratio between advancing and declining stocks). As the chart below shows, the market was rallying last week moving higher but market breath is actually going down indicating that most of the stock are declining and only a few are going up.

And that same experience could be happening to your portfolio, too. The market is up 30% this year but your portfolio lags. Mine does. My market indicator shows the index to be up 15.88% while my portfolio is up 8.66% only. Why is that? I do everything I can, and I hope that “everything I can” is the right thing to do. I invest in high quality stocks, reinvest the dividends and on top of that, I sell covered calls and options to generate further income. Yet my portfolio lags. Why?

The answer is simple, my stocks do not participate in the rally, and I do not own all the darlings that push this market up. Yes, I do own some shares of Microsoft, Apple, and Google, but not enough to prop my portfolio in the same way they prop the index. We can see this when we look at equal weighted SPX index and compare it with SPX:

And yes, we must admit that the equal weighted index is going nowhere while SPX (the bottom picture) is reaching a new high in the same period. And that can be concerning. A lot!
But how concerning is it? Well, the problem is that many investors that claim to be long term investors are sitting in cash and waiting for a better tomorrow instead of being invested. The amount of bearishness is still extremely high, higher than it was in 2008-2009. But it is changing although that change is subtle and not as obvious as one would think. But all we need is perspective. If we step out and look at the breadth from a longer perspective, we start seeing some improvement:

As we can see from the chart above, the market breadth is actually making new all time high! Of course, it still may all change. Bad news from the FED, bad CPI report next week, or raging inflation can change it all right away. But it hasn’t changed yet. In fact, it is telling me that more and more of the laggards are coming to participate in the market and as more of them do so, more people will realize that sitting on the sidelines was stupid and these same people will once again become the so called “long-term investors” (until the next bear market).
This dominance of a handful stocks leading this new bull market may end soon as we start seeing the rally slowly spreading into the industrial, aerospace, financial, energy, and material sectors. This can help this rally even more as broader market starts participating and more investors will feel the FOMO and make this bull more sustainable.

Just a few minutes ago before I started putting together this newsletter, we received news that our inept politicians finally struct a deal and they would vote about rising the debt ceiling on Wednesday next week. In my last newsletter rant about the debt ceiling, I expressed my conviction that in the end, the politicians will make a deal, unless they want to cut the tree branch, on which they are sitting, off under their own asses and screw themselves and us with them. I couldn’t believe that they would be that stupid, though I have no illusions about them anymore.

Based on this news, I would expect that the markets will rally next week. But the markets would rally despite the debt ceiling circus in Capitol Hill. The debt ceiling could only temporarily choke the markets but not for long. Why? Because this is all noise. None of it matters long term. This doesn’t drive the markets up or down. It only pushes them around the fair value of the markets and creates opportunities when idiots out there start panicking about a wrong issue and rush to exits. So, learn about the market and stop being an idiot. There are enough of them already.

So, what drives the markets? Earnings. But most importantly, earnings estimates! Earnings and estimates go up, the markets follow. They go down and the markets follow too.
Just recently, I saw this chart on Twitter:

If you think rationally, you will dismiss this nonsensical “analysis” as total trash. If you think the markets behave based on some arbitrarily created chart describing a bubble and a real chart scaled to the tune of the cartoon to make it look like we are about to crash, because the cartoon said so, you have no place in the markets, unless you want to lose money. The idiocy in the chart above is unspeakable.

Rather than guessing and wishful thinking, gather information about the markets. And it has been proven many times that earnings drive the markets. And you will also see how retail investors deceive themselves by being uninformed.

Many times, during 2020 and 2021 retail investors were posting on social media that the market is way overbought and in a parabolic rally and doomed to crash. They were posting charts like the one above proving their point. The bear market eventually happened but not when they wanted it. And all you needed to do is to look at earnings.

If you were betting on the market crash in 2020 and 2021 because the market (blue line) was in parabola you got badly burned. A simple look at earnings (orange line) could tell you that the earnings were skyrocketing too. It is a typical behavior after any crash. Look at 2009. A sharp rebound in earnings and strong rally. And the markets followed (despite media warnings us almost every day about an imminent second recession).

And the same happened in 2020. The earnings crashed but rebounded and rallied. This time, the markets went ahead of itself and rallied more than the earnings, but the earnings rally was parabolical too. There was no reason expecting the markets to crash. When earnings finally stopped going up, the markets followed.

Today, we keep hearing from bears that the markets are bound for a second leg down. Well, unless the earnings continue to go down, this will not happen. And so far, earnings came back better than expected (80% of the companies beat their expectations) and estimates are no longer revised to the downside. And at the end of the year of 2023 earnings are being revised up. If the companies continue to beat these estimates, the markets will follow higher.

And, if we look at the shorter time frame, we can see that the markets are more pessimistic about the earnings than the earnings themselves. The markets are lagging the earnings:

What is this telling you? Well, a simple thing! The markets have plenty of room to the upside. And if earnings start sloping up, expect a strong rally. And of course, the bears will get crushed on the way up, until they admit that they were on the wrong side and start the FOMO.