Account Net-Liq: $7,735.95
SPX value: 3,380.35
Shiller PE: 31.27

 
 
This is an entry I wrote into my Trading Journal yesterday about the market behavior:
 

Are we going to see a correction?
Account Net-Liq: $7,815.02
SPX value: 3,333.69
Shiller PE: 30.83
 

After a relentless rally, the markets suddenly sold off at the end of today’s session. Of course, the media are telling us that it was because of some new optimism of the vaccine and now because of some pessimism over that same vaccine which everyone was so optimistic just the day before. But who cares. We needed the market to ease a bit. So this dip is welcome. Unless it turns into something else, it is just a dip. And as such, buy the dip. And I think, we are at the beginning of a long term bull market (well, I would say next 5 years) and economic expansion. So, if there is a dip on the road to that economic expansion, buy that dip. And be prepared that the dip may be up to 5% deep, and it will be a very common thing.

I had some other members who follow my market reviews (for which I take no responsibility and no guarantee of it being correct – remember, I totally suck in technical analysis and I do this to learn it. And the best way to learn it is doing it.) asking me if I expect this selloff to continue. My response was that no, I didn’t expect it to continue. I thought it was just a blip and a small dip.

I also had some other members asking me if I think a second crash is coming. Again. my response is – no, I do not expect it. I do not see any fundamentals for it to happen:
 

1. There are still tons of cash aside sitting in savings accounts making close to none interest. These monies need to start shifting from the savings accounts to the market. It has not yet started happening.

 

2. People are still too pessimistic and out of the market. If you look at AAII (American Association of Individual Investors) sentiment poll, over 40% of investors are bearish. This is unprecedentedly high number last seen in 2008 and we have not had any similar crisis like in 2008. Today’s crisis is artificial and will not last forever. It is not a systemic crisis that would turn this bull into a long term bear.

 

3. The market is pricing a LESS BAD economic outcome. No one, even the worst pessimist can expect the economy to be down forever. The average recovery takes 1 to 3 years. But this time is valid in case there was systemic damage. The COVID is not systemic. This was an artificial stop and it will pass. Businesses are opening more and more, and the economy will recover no matter what you think about the valuations and economic activities in the US.

 

4. Don’t forget the FED. I believe, FED is the main reason why all the good ole valuation metrics no longer work. If you look at the market PE (or Schiller PE) and decide to invest when the stocks become cheap based on these metrics, then I have bad news for you – you will never invest, thanks to FED’s involvement and artificial inflation. Do you think the market will ever correct from this inflation? Well, yes, maybe, one day it may. But we recently just went through a 40% decline. A 40% decline is a serious correction. If you think otherwise, you need to study the previous market history. A 40% decline doesn’t happen very often. And, you know… FED, when such a decline happens, FED is always here for you to bail you out (well, if you are invested instead of sitting aside and waiting for valuations). Another thing about valuations is that the last one favorable one happened 20 years ago. Since then, the market always traded at a premium. And, even Ben Graham admitted that PE has an expanding feature built-in, so during his times, the average market PE was 20, but he recommended using 25 because of the PE expansion. Today, the average PE is 28, but we constantly trade around 20 – 31. Last time, when the market dropped below 28 was… you guessed it – in 2008. And, do you have time to wait for another 10 to 15 years for the PE to drop below 28? I don’t!

And today, the market rallied hard and not only erased all the losses from yesterday but also added more gains. We are almost where we were before the COVID crisis. The previous ATH was at 3394, today, we have reached 3388.62 and returned back into the channel. Until this trend breaks, do not expect any change in direction. All previous breaks down were in fact just dips. We had no confirmation from those dips and the market was immediately bought back and went up again. Thus my expectation is – up again.

This is also confirmed by big market participants who are positioning themselves for a big economic expansion (moving money back to traditional industrial sectors). So, big players do not expect a crash so why should you?

Join us at MeWe to see trades we take.

Account Net-Liq: $6,801.82
SPX value: 3,294.61
Shiller PE: 30.70

 
 
The problem of all bears out there predicting the second crash is that it is their wishful thinking and prayers. They again look at metrics such as PE, or other valuations and completely ignore FED and that those metrics do not work when FED is involved.

S&P500 continued higher today despite anything you may think and wish for. An interesting thing is that it broke the uptrend support line a few days ago (in fact two support lines) making it all look like a failed breakout on a daily chart:

Yet, the market started hugging the belly of the trend and keeps moving higher. But, if we look at longer-term daily and weekly charts we see a different picture all of a sudden. We are near the gap which happened in March 2020. I believe, this gap will have to be closed before we see any further action.

We are also near the resistance and pain area where many weak hands may want to unload their positions unless they did it all in March when they panicked and sold everything. If this is the case, we may see a new ATH in making here. We had 2 months of consolidation of the previous gains – that is good for the market no matter what you think of it. We recovered the majority of the losses and now we consolidated those gains! And recently, we broke up from the consolidation pattern. We re-tested that breakout – also a good thing for this market. And recently, we continued higher:

Of course, in this “pain” area, we may see a lot of choppiness and war between bears and bulls but it seems, bears have a weak hand here.

The weekly chart is even more descriptive in where we are heading next. And, in my opinion, it is not down.

You can choose and decide to fight this market and short it but it would be a painful fight. Short term, yes, we may see some pullbacks but medium to long term, we are going to ATH.

Join us at MeWe to see trades we take.

Account Net-Liq: $5,534.40
SPX value: 3,215.63
Shiller PE: 29.97

Was the drop we saw last week a blip caused by the coronavirus and employment data no one cares about anyway anymore?
It looks like it. As Jani said in his post, this may be just a wobble, bulls no longer care about anymore and we need more to shake this market. True, all we saw was old news. Everybody knows what was going on and that the virus is here, it ain’t going anywhere, we have rising cases but all that will come to an end at some point in the future. Nothing surprising. No new black swan anymore.

Thu futures are up as of now (11:00 pm MT) 0.48%. Will it last until the opening bell? And more importantly, during the entire trading session? I wish we stayed where we are and went slightly higher during this week but not too much. I have an SPX trade which is set to expire this week (well, if we stay in this range and above 3210 by Friday). I have to wait to find out.

Account Net-Liq: $5,534.40
SPX value: 3,215.63
Shiller PE: 29.97

People keep screaming: “The market is overvalued!” Maybe. Investors use all sorts of metrics and formulas to calculate the valuation of the market. They use PE, Shiller PE, Buffett Indicator (typically a Wilshire 5000 Total market cap / GDP ratio) and according to all these metrics, the market is overvalued.

For example, whenever the “Buffett indicator” goes above 113% the market is considered overvalued, and with the current reading at 153% it is considered significantly overvalued:

With today’s ratio at 152.3% the market is significantly overvalued.

But, there are a few problems with all these metrics. First of all, they have no predictive value, so saying “the market is overvalued so I will wait for better valuation”, can cost you a lot of precious time and money. The market can stay overvalued for years or get even worse before it corrects itself.

Second, these metrics became obsolete the very first moment the FED started messing things up and got itself involved with fixing the economy and the stock market. The day, FED started pouring trillions of dollars into the economy and the market, the indexes got completely detached from reality.

When you look at the recent correction when the markets shed 40% of its value, it became just an insignificant blip on the market valuations. Compare the correction in 2000 – 2003 and 2008 – 2009 with 2020 on the chart below. You won’t even notice it!!

In fact, there is no blip!

That’s how ballooned the market is. Trillions of dollars in QE, FED’s bond-buying (and now even junk bonds purchasing), all that contributed to the market being where it is today.

So, what should you do?

In my opinion, definitely not waiting! People are selling their stocks, waiting aside, and speaking about the overvalued market. Many are just simply waiting for a better valuation. But, here is a problem.

When was the last time, this market was overvalued this high? It was in 2000, it was 20 years ago. It took almost 9 years for the market to get strongly undervalued. Back then, the market lost 70% of its value and you can clearly distinguish that value drop on the valuation chart. In March 2020 the market dropped 40% and it was a small blip that quickly recovered. And even that, people refused to buy in the market because the valuation was too high. With all that said, waiting may cost you 10 years or even 20 years of time waiting. And time, my friends, time, is what we do not have. Once we lose that time, we can never go back and fix our errors.

What you gonna do? Waiting can be extremely costly, investing now may be expensive.

The only way out of this situation I see feasible is to keep investing. Keep buying high-quality dividend growth stocks, or if you do not feel comfortable with individual stocks, keep accumulating ETFs. Buy index and sector funds, such as SPY, XLE, XLY, XLU, etc. There is a great website Deep value ETF accumulator which posts a set of ETFs and their valuations. You can keep buying those which are considered undervalued, or even in “crash” mode and keep investing and rotate to those undervalued ETFs. They post the charts every week, just follow those charts and keep buying.

Or, if you like individual stocks, as I do, pick the dividend aristocrats and start investing in them. Here is a set of stocks I like to accumulate:

But, hey, we just said, that the stock market is overvalued, in fact, extremely overvalued! And now, we should be buying these stocks?

Yes, we should be buying these stocks, but also monetize them. Keep buying these stocks until you reach 100 shares (in case you do not have enough money to buy 100 shares outright) and once you reach 100 shares, start selling covered calls. Lower your cost basis. Keep doing it every month. Keep a record of your initial cost basis and premiums you receive from the covered calls. If you buy a stock at $34 a share and you sell a covered call for 0.34 premium, your cost basis would go down to 33.66 a share. Repeat this every month. Collect dividends and premiums and keep track of your cost basis. One day, your cost basis will reach zero. And once your stock reaches zero, you own the stock for free. And in this case, who cares about market valuations? Nobody! I don’t! And if you happen to get assigned and your stock is called away, then start selling cash-secured puts and collect premiums. And keep track of those premiums because once you get assigned and you buy back 100 shares of your stock, the premiums you collected in the meantime can be counted against your cost basis again.

That is the only way, I see, as a feasible method of going around the high market valuations. The FED will stay and it will be involved in propping the markets and economy more and more. The old metrics will no longer work, new will develop. And you have to adapt to the new reality too. And yes, keep buying not only today when the market is high, but also when the market crashes (many missed that boat and now pray for another crash which may not come in the next 10+ years).