Record debt
means record valuations on stock markets, as long as the debt can be paid back.
What can stop this debt payback? An increase in interest rates or a decline in demand.
Since the
decline in the markets from October until December, markets have rebounded and
found new all time highs. Just to put in perspective how fast this rally was,
and how much the price increased: it took 80 trading days to let the Nasdaq 100
or NDX decline 23%, while it took only 73 trading days to go up 29%. Over the
past 3 weeks it increased another 4%.
The Nasdaq
has been up 15 weeks out of the past 17, which last happened at the peak of the
2000 bubble. Complacency galore.
The largest
chunk of the rally comes from the tech sector, which is quite unsurprising.
While not even being close to levels last seen in 2000, the tech sector is
still outperforming the S&P 500 and is now the strongest since 2001.
The
flipside of this is that cumulative flows to tech funds have crashed since the
peak in late 2018, and are now almost negative. This is bad news for all tech
companies who are about to get listed. One can think of Pinterest, Slack,
Robinhood and WeWork.
Investors
are becoming more confident after the December dip, with the bull-bear spread
now reaching October 2018 levels. What does it take for investors to run
towards the exit again, just like they did in December?
Dumb money is also more confident than they have
been in a long time. Since 2010 to be precise. The dumb Money indicator include
the equity-only put/call ratio, the flow into and out of the Rydex series of
index mutual funds, and small speculators in equity index futures contracts.
The reason
why many investors are becoming so optimistic again, is because there haven`t
been any large declines for a while. On average, it takes 48 days to have a 3%
sell-off in a day. Currently we`re at 69 days, which is practically 50% higher
than average.
“It is far more common for people to allow ego to stand in the way of learning.”
- Ray Dalio -
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 The information in this publication may become outdated and there is no obligation to update any such information.