Bull Markets are Born on Pessimism and Die on Euphoria

Dear Reader,

If there were ever a time that investors need the kind of research and analyses Crush the Street is providing, this would be it.  It’s one of the most baffling markets ever for anyone except the most seasoned, prudent, and patient investors. Yet, there are winners to be chosen, even in the most challenging of market environments – huge winners, in fact.

On one hand, investors are weighing the fact that large-scale market crashes tend to occur about once per decade. By all logic, then, we’re due for a sizable correction because the last one took place a decade ago. Put it this way: the longer we go without a crash, the more likely a crash becomes, or so it seems.

But on the other hand, markets are driven by sentiment, not logic, at least in the short-term. Two classic pieces of wisdom are apropos here: “Bull markets don’t die of old age” (unknown source) and “The market can remain irrational longer than you can remain solvent” (John Maynard Keynes). I should probably add to those two, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria” (Sir John Templeton).

I’m always reminded of this well-worn graphic whenever I hear the Templeton quote:

So, which phase are we in now? I’m personally thinking we’re in the “greed” phase, or the tail end of what Templeton would have called “maturing on optimism.” We’re having a tough time getting to the “delusion” phase because unlike in 1987, 2000, and 2008, nowadays everybody talks about how a major market correction is overdue – and crashes tend not to happen when people are expecting them.

Arithmetically, it doesn’t make sense that people were more excited to buy Dow Jones at 26,000 than at 15,000, but we have certainly seen that with the enthusiasm that has set into the economic environment.

A sustained downturn in the equities markets would need the element of surprise – some sort of catalyst like we had with the bursting of the Dotcom bubble in 2000 or the failure of Lehman Brothers and Bear Stearns in 2008. But nothing seems to stick in this “Teflon market” anymore: not trade tensions with China, not missile threats from North Korea… not even lofty stock valuations, which are overinflated by just about any metric:

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    Pick your poison: P/E ratio, CAPE, price versus revenues… It’s all too darned high, and the market couldn’t care less. But there are headwinds indicating that “something is rotten in the state of Denmark”: specifically a Fed that has painted itself into a corner and that, after pushing 10-year Treasury yields down to 1.37%, has nowhere to go but up:

    And up it must go, as Treasury yields must keep pace with the rate of inflation (otherwise no one would buy them) and the inflation rate is bound to keep rising because that very same Fed is printing dollars into oblivion. It’s a vicious cycle that makes late-cycle equities market investing challenging because blue-chips yield less reward at a much greater risk than they did just a few years ago.

    There are other chinks appearing in the major indices’ armor, as well. Investors would be prudent to take a look at the Russell 2000, the small-caps index that often foreshadows what’s in store for the other major indices. It appears that the Russell 2000 is setting up for the dreaded “death cross” formation, in which the 50-day moving average is crossing below the 200-day moving average:

    The “death cross” doesn’t always precede a major market crash, but it does tend to indicate that something’s not quite right under the hood, even if the exterior of the vehicle has a nice, shiny paint job. At the very least, we can conclude that it’s perfectly reasonable to hedge our positions and conclude that it’s a stock picker’s market – one in which we must pick our stocks very carefully, and only after very thorough research.

    My goal here at Crush the Street, is to pick winners even in the most precarious of market conditions. We were pounding the table for the cryptocurrency movement long before the 2017 run-up; we picked huge winners ahead of the cannabis trend; and our followers still thank me today for our ahead-of-the-curve picks in the artificial intelligence space.

    Can you profit in a tough market environment? You absolutely can – we’re doing it time and again, and Crush the Street will keep on bringing you the best-in-class research, analysis, and commentary that we’re known for. So get ready for 2019: no worries in this old bull market – it’s shaping up to be our best year yet.

    Prosperous Regards,
    Kenneth Ameduri
    Chief Editor, CrushTheStreet.com

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