(This post is made in conjunction with the last post, “The Stock Market Bubble – General Comments“)
There are various aspects of the stock market that lead me to conclude that the stock market is experiencing a bubble.
First, for reference purposes, here is a 1-year daily chart of the S&P500 updated through February 28, 2011:
(click on chart to enlarge)(chart courtesy of StockCharts.com)
Here is a list of various general areas that, in total, I believe support the conclusion that the stock market is a bubble :
- Exceedingly strong price action; by many measures this rally is among – if not – the strongest in history
- This is seen in the price chart of the S&P500 – as well as many individual stocks – as an increasingly “parabolic” trajectory, especially viewed from September 2010 to present
- A high degree of “froth” – Although difficult to prove, “froth” is often seen during the terminal stages of asset bubbles
- Excessively high sentiment – Among established, quantifiable sentiment measures, this stock market has been displaying prolonged periods of excessive sentiment readings
- Extremely rapid valuation increases seen in a variety of private (tech) companies to high valuations, despite any clear indication that fundamentals have changed proportionately
- The stock market seems to have the “feel” of a self-feeding mania, which was seen in other recent bubbles such as the NASDAQ and Internet bubbles of the late-90s, as well as the housing bubble
- Proprietary measures that I keep that show vast overvaluation
- A general attitude of “nothing bad can happen” – often the low interest rate environment and strong intervention policies such as QE2 are quoted as “guarantees” precluding any substantial adversity
I have repeatedly stated, since my June 2, 2010 post, that I believe the stock market will continue to rise despite highly problematical future conditions in both the stock market and overall economy. While I still think it will continue to rise, at this point I feel that it is becoming an increasingly (very) high-risk proposition to hold long equity positions. This is especially so given my certainty that there will be an exceedingly large stock market “crash” in the future, of which I have previously commented upon.
A Special Note concerning our economic situation is found here
SPX at 1327.22 as this post is written