Thanksgiving Day
Nov 26 2020
An Either Or Situation
"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." –
Sir John Templeton
The markets have defied gravity and made new highs this past week. Last week we allowed that the markets were issuing a Dow Theory Buy Signal as the Transports and Industrials both hit new highs. In Charles Dow Theory of 1896 this meant one index confirmed the new high in the other.
And there is more. The Small Capitalization index Russell 2000 and S & P Mid Cap made new highs. New highs in the smaller stocks is usually bullish. And the small cap indexes are rising faster than the larger industrial indexes.
Hospitality stocks including airlines, hotels, casinos, and cruise lines have been battered this year. Even those are defiantly breaking out.
Energy has lagged all groups but is the best performer of November. Crude oil, West Texas intermediate, broke out above my resistance line at $45 closing at $45.71 Wednesday. Energy ETF XLE has gapped up multiple times in November from $28 to $40. Even left for dead Energy Service XES has done the same closing at $43.17.
Banks stocks are all up on an expected better economy and higher interest rates. So, there is nothing to worry about, right?
Not so fast. The markets have shrugged off the Elliot Wave completion patters, edging ever higher. But other measures suggest we are at that last gasp of enthusiasm ala October 1987 or March 2000.
The National Association of Active Investment Manager Exposure Index records weekly equity allocation. It now stands at 106%. This means funds are borrowing to buy more equity, witness the Fear of Missing Out FOMO.
The last time we hit those highs just before the September peak this year and in December 2017 before the January 2018 peak.
Last week we also noted the outsize valuation of Tesla. It is up 609% this year. At market tops investors crowd into a handful of stocks (FANG) but Tesla is one for the record books. It rallied 50% in November recording a price earnings ratio of 247. The S & P P/E ratio is about 21. Such extreme sentiment measures accompany market tops.
We have been overly cautious this year. But these valuations are no time to ignore that advice.
Enjoy the Thanksgiving Holiday and thanks for reading.
Younger readers unfamiliar with investment guru John Templeton can watch is Wall Street Week Interview in 1987 on youtube and read about his success on Wikipedia.
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