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We Aren't Even Close to a Top in Stock Prices

By Dr. Steve Sjuggerud
Monday, May 2, 2016

My friend, you're focusing on the wrong things...
 
Yes, I know that stocks have mostly gone up since 2009. That's seven years. That makes this bull market old. But stock market booms don't die of old age.
 
And yes, I know, stocks are getting "up there" in valuation. But high valuations by themselves don't kill stock market booms.
 
There's only one thing that kills a stock market boom...
 
I'm talking about extreme optimism.
 
Why does this kill a boom?
 
It's simple. When everyone who wants to buy has already bought, then nobody is left to buy. (Alan Greenspan famously called this "irrational exuberance.")
 
So I ask you... have we reached a point of extreme optimism?
 
What does this point look like?
 
To me, it looks like the U.S. real estate market in 2006.
 
You remember... People thought that house prices could go up 20% a year forever – while incomes were growing at 2% a year.
 
Think about that math... It's obvious that at some point, people wouldn't be able to afford to buy homes. But people became irrationally exuberant about housing and kept buying anyway. It had to end.
 
So... are people irrationally exuberant about stocks today?
 
I'll spare you the suspense: NO.
 
Fewer Americans hold stocks than at any time in decades, according to the latest numbers from research firm Gallup (covering 19 years of polls).
 
Does that sound like irrational exuberance? No... It sounds more like pessimism to me!
 
Incidentally, Gallup reports that the two highest percentages of Americans owning stocks were in 2000 and 2007 – both stock market peaks.
 
And it isn't just households that are pessimistic. Professional investors are, too...
 
Last week, Barron's magazine published its twice-annual "Big Money" poll. It said, "The current reading is perhaps one of the least bullish in the poll's more than 20-year history..."
 
When asked, "Do you expect stocks to rise 10% or more in the next 12 months?" 68% of the respondents in the "Big Money" poll said "no."
 
When asked the opposite question, "Do you expect stocks to fall by 10% or more in the next 12 months?" respondents gave the opposite answer – 66% of the "Big Money" respondents said "yes."
 
Now, tell me... does this sound like "extreme optimism" to you? Does this sound like "irrational exuberance"? Does this sound like the housing market back in 2006?
 
No. No. And no.
 
Asset prices peak when optimism reaches an extreme in that asset. We are nowhere near that point in stocks yet.
 
Don't forget it!
 
Good investing,
 
Steve




Further Reading:

Steve often uses investor sentiment as a way to gauge the market's temperature. In September, he wrote that "this bull market in stocks is not even close to over yet." Seven months later, the S&P 500 is up nearly 7%. Get the story here.
 
In September, Brett Eversole noticed that extreme negative sentiment had made a familiar blue-chip company go "on sale." Readers who took his advice are up more than 20%. Get the details here: One of the World's Strongest Businesses Just Went on Sale.

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Baxter International (BAX)... medical devices
Becton Dickinson (BDX)... medical devices
Boston Scientific (BSX)... medical devices
Edwards Lifesciences (EW)... medical devices
Medtronic (MDT)... medical devices
Bristol-Myers Squibb (BMY)... Big Pharma
UnitedHealth (UNH)... health care
Agnico Eagle Mines (AEM)... precious metals
Barrick Gold (ABX)... precious metals
Iamgold (IAG)... precious metals
Kinross Gold (KGC)... precious metals
Newmont Mining (NEM)... precious metals
Yamana Gold (AUY)... precious metals
ADT (ADT)... home security
Aflac (AFL)... car insurance
Lockheed Martin (LMT)... "offense" contractor
Northrop Grumman (NOC)... "offense" contractor
Coach (COH)... luxury handbags
Cash America International (CSH)... pawn shops
U.S. Concrete (USCR)... concrete
Stanley Black & Decker (SWK)... tools
Equifax (EFX)... credit reporting
Texas Instruments (TXN)... electronics
Facebook (FB)... social media
Charter Communications (CHTR)... cable television
Time Warner Cable (TWC)... cable television
DreamWorks Animation (DWA)... animated movies

NEW LOWS OF NOTE LAST WEEK
 
H&R Block (HRB)... tax preparation
Liberty Tax (TAX)... tax preparation
Buffalo Wild Wings (BWLD)... restaurants
J&J Snack Foods (JJSF)... food and beverages
Ericsson (ERIC)... telecommunications

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