August 2018 - Bubbles and Bottoms for Stock Markets -

I delayed the writing of this newsletter to celebrate the official longest bull market in history (3453 days), surpassing the bull market from 1990 until 2000. To be clear, i`m talking about the S&P 500. This bull market has seen a 323% return, and an average yearly return of 16.5%.

The bull market might not be active for much longer though, as it becomes more and more attractive for investors to just hold cash. How does that work? Currently, the dividend yield of the average S&P 500 company is lower than the yield on a 3-month Treasury bill in the U.S.
3-month treasury notes are often seen as “risk free”. So why would any investor (who only cares about their dividends) still risk their money on the stock market, if the risk-free yield is higher?

In a normal market, most stock are either making 52-week highs, or near 52 week lows. But if both occur at the same time, a technical indicator called the “Hindenburg omen” is triggered. There are a few more prerequisites to triggering this indicator, but for the sake of clarity, i`ll stick to the above description. This Hindenburg omen is normally triggered at the end of an uptrend in the market, when many new 52-week highs are registered, but more and more companies can`t keep up with the constant growth and start showing 52-week lows. It is controversial, because often a single trigger of this indicator does not warrant a bearish position for the investor. However, if the indicator gets triggered many times in a certain period of time, a pattern starts appearing:

Looking at this chart, it becomes clear that the Hindenburg omen is triggered many times when a long-term peak starts forming in the markets. Do take note that this chart only goes back about 20 years, and that out of the 3 past spikes (2016, 2008, 2000) only two were correctly predicted to turn a bear market.

“Why did nobody see it coming?”
- Queen Elizabeth, 2008 -

I often hear that bear markets are great buying opportunities, because eventually we will come back to reaching all time highs. But how long can this “eventually” take? It took the Nasdaq-100 16 years (2000-2016) to come back to all time high levels. That`s half a generation! The Japanese Nikkei reached an all time high in 1990, and still, after 28 years, it has only reached a level that is 60% of what it used to be.

Hold on, I forgot to adjust this for inflation...

30-year-old Japanese investors who jumped into the stock market in 1990 and decided to “sit and wait”, are now 58 years old and still have a loss of 75%. I`m not saying that it could happen to the current stock markets in the U.S., but there is always the possibility. Are you financially strong enough to “HODL”, as the poor crypto community would say?

Is it only the U.S. that are currently witnessing massive stock market bubbles? On the contrary. It seems that the entire world is going bonkers, despite the declines in certain emerging markets like Turkey. The total global stock market capitalization compared to the global GDP is close to the all-time highs from the dot com bubble and housing bubble.

"Celebrating the longest bull market ever without mentioning 10 years of 
artificial stimulus and intervention is like celebrating Lance Armstrong's 
Tour de France record without mentioning doping."
- Sven Henrich -

The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.