Turn on CNBC and you will hear trade after trade recommendation, many of which are to buy NVDA, and if you go to Youtube you’ll see mostly videos about AI and NDVA from a bunch of people trying to mimic Cathie Wood, because that is what those trading the stock market now want to hear. What you won’t see is someone telling you that they see nothing to do in the stock market, because anyone who tells you that will lose their entire audience. That’s why I have had little to say in the past few weeks and may not for the next few months either. I haven’t even put up a Youtube video since March. The time to buy stocks was during the November, 2022 – early February, 2023 time frame and not now. Back then I was saying that I thought we could be starting a new cyclical (2-5 year) bull market due to the significant improvement in the internals of the stock market – the so called “thrust indicator.”
Now I am saying I see nothing to do and am saying almost nothing.
I don’t think it’s time to short or bet against stocks, because I don’t see any signs that the stock market is about to roll over into a new bear market anytime soon. It may – and most likely – will hold in there into next summer or after the next Presidential election. Back in January I was saying I thought that could easily happen and would be in line with the type of short-term term cyclical two year bull markets seen from 1967-1983. That time period was a long-term secular sideways bear market defined by inflation, just as we are now in a time of secular inflation. That also means that I see limited price upside in the stock market from here too. Maybe it goes up another 10%, but that isn’t exciting when you can now get a guaranteed 5%+ return from short-term bonds and CD’s with no risk. I rather say little as I am doing zero trading for now and likely at least through the summer.
Secondly, the stock market valuations are at nosebleed levels, as you can see from this chart of the S&P 500’s CAPE ratio.
The CAPE ratio is the 10-year average P/E ratio adjusted for inflation. It’ll probably take a decade for it to fall to a level considered cheap. It will take a decade of sideways market action and inflation to make it happen. That means a decade of cyclical bull and bear markets.
This year the stock rally looked strong until the banks got smashed in March, but the market shook off that bad news and we saw the averages drive higher. However, all of the market leadership since March has been in about 5 big cap tech stocks (NVDA, AAPL, MSFT, GOOG, AMZN). It’s “FANG” all over again, but this time even more extreme. That means the internals of the market are actually weak now, but that weakness is masked by these five stocks. These five stocks are driving an incredible 96% of the entire return in the S&P 500 this year!
You can see what that means by comparing a chart of the S&P 500 with that of an equal weighted market cap S&P 500 ETF.
The S&P 500 is above its August high of last year, while the equal weighted S&P 500 ETF isn’t even above it’s February high.
Buying the stock market now means basically chasing the action in these five stocks. That works until it stops working.
When will it stop?
Market internals can trade weak like this for twelve months before they matter, but bad news can also suddenly swamp everything. A geopolitical event or sudden news of the economy hitting a wall is the type of bad news that can do it.
I am just watching and being patient for now. Market volatility is also shrinking for the moment, which is part of this stage of the rally and makes it so not much is happening for now and I don’t expect that to change this summer.
We got one more likely final Fed rate hike now in July that is likely holding precious metals back for now. All the predictions that inflation would vanish this year proved to be false and forced the Fed to position itself for an additional rate hike at it’s last meeting, thereby pushing out the day of actual rate cuts. That had to be priced into the market and impacted the metals trade too.
I’m using time away from the markets now to work on other projects.
-Mike
