Danger Zone

There’s two kinds of danger zone — the kind where things are dangerous, and the kind where you’re crankin’ out Kenny Loggins while having a great time. The current stock market could be both.

Futures are set to have the S&P 500 and NASDAQ both at all-time highs… again. And the week looks to be positive.

Why?

Much of it has to do with mega-cap tech climbing through the roof. It’s obscuring everything underneath the surface of this market because it is doing so well and it’s so big it just kind of eclipses everything else.

The other reasons are much of what we’ve discussed for a long time — Fed suppression of interest rates means risk is mispriced and money is forced into the markets; stimulus and money printing had to go somewhere; and the short-term favorite: irony.

Irony is not a real market rationale, but it seems to fit the bill. The irony is that the markets are going higher in spite of an unstable political, social, and economic environment.

In short, the market either knows something we don’t, or it doesn’t care as much as we do about all the social non-sense we’re struggling with.

This is not to say the issues don’t matter. In fact, they may even matter to the market. Just… not yet.

It appears that risk appears to be getting mispriced all over again. When you see a company like Tesla priced over $2100 a share with a PE Ratio of nearly 1100 (while Apple has a PE of about 38) one has to question the sanity of the markets.

The VIX has been on the decline, tech PE’s are astronomical, and the markets are at all-time highs… while unemployment is near-all-time-highs, the entire national education system is in a tailspin, and a pandemic is still happening (at least we’re told it’s a thing – and I suspect the people that have Covid will tell you it’s a thing, even if you don’t think it’s a thing).

In short, there are plenty of reasons to question the sanity of the markets. And yet they go higher…

This is the classic definition of momentum. Climb the wall of worry. Low volumes, higher volatility, and higher prices…

Well, it works until it doesn’t work. And the bigger fool theory works until you run out of fools. But how long does that take?

If history is any indicator, September we may start to see volatility return. We may see another stimulus package. We may see more manna from heaven in the form of checks to unemployed. Heck, we could even see another round of PPP loans for small businesses.

But will we see the markets keep going higher?

Statistically speaking, we’re getting into rarefied air up here. Markets have now extended gains since late July, with only 12 negative days for the S&P 500 since June 29th. That’s a pretty solid win streak with volatility dropping like a stone.

Probability suggests if we flip a coin, each individual outcome is 50/50 heads or tails. And each coin flip is an independent sample with the same probability of outcome. But gaming theory suggests the probability of flipping heads 10 times in a row, while possible, is well below 50/50.

So which is it? Does the market keep going higher, or does it correct?

The best we have is an educated guess… but here’s the guess: for this week, markets go even higher… because there seems to be little in the path of the bulls, and there are still bigger fools out there afraid of missing out.

This thing will end badly for some people. It’s reminiscent of the 1998-99 attitude in some of the tech areas of the market. “This time it’s different.” Sure… because history doesn’t repeat itself… but it rhymes.

For this week, just look for things to go higher. SPX support is at 3360, and resistance is at 3450-ish… there really isn’t resistance per say, just a big number the market hasn’t tested yet. So at some point there will be some sell off just because traders will get impatient and want some profits. Still… wild times.

As we’ve said before: keep doing what the market tells you to do until it tells you to do something different. Or, said another way… run with the lemmings, just stop when you get to the cliff.

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