The consensus seems to be that the stock market is on its way to much higher levels, and soon. The near-term targets for the S&P 500 (SPX, currently around 3,235) range from 3,500 to 4,000, with longer-term targets reaching “the sky’s the limit.”
The consensus reasoning goes like this:
— Central banks can print a lot more money
— Stocks rise when central banks print more money.
The history of the 2009-2019 era strongly supports this simple cause-effect, and so just about everyone is on the same side of the boat, the “don’t fight the Fed” side of ever-higher stock multiples and ever-higher prices.
Simply put: sales and profits no longer matter, the only thing that matters is whether central banks are printing more money. And since we all know they’ll have to print more money to keep the flying pig (the stock market) aloft, then it follows as night follows day that stocks will rise essentially forever.
As soon as the consensus has settled complacently on one side of the boat, contrarians take notice as history has a perverse habit of foiling any overwhelmingly complacent consensus.
These charts help us understand that a top is not just price, but a reversal in extremes of margin debt, valuation and sentiment.
In blow-off tops, extremes of valuation, complacency and margin debt can always shoot beyond previous extremes to new extremes. This is why guessing when the blow-off top implodes is so hazardous: extreme can always get more extreme.
Nonetheless, extremes eventually reverse, and generally in rough symmetry with their explosive rise. Exhibit 1 is margin debt: NYSE Margin Debt Hits a New Record High (Doug Short)
Note the explosive rise in margin debt in the past few months:
Those who lived through the last two speculative blow-off tops know the impossibility of predicting the final top.
How can we tell if stocks are in the final blow-off stage of a bubble? There are four basic give-aways:
If the advance from January 2013 to the top in early 2014 isn’t a blow-off top, it’s certainly a pretty good imitation of one.
Technical analysis seeks to identify trends and recognize signals. The predictive value of trends (up, flat or down) and signals (buy, hold or sell) is self-evident, hence the widespread interest in charts of price and various indicators.