Bubble? Or New Uptrend?

Posted on January 25, 2021 by Aaron Warwick

If you’re like me, you’ve heard lots of fellow investors speaking recently about how the stock market is currently “in a bubble.” Well, perhaps that’s because, according to JC Parets at All Star Charts, a recent E-Trade StreetWise survey revealed 66% of investors believe the market is in bubble territory. And another 25% think the market is approaching a bubble. As JC points out, that’s over 90% of investors thinking we’re in or near a bubble.

Although I cannot say I am a full-on “contrarian” investor, I do believe the market often fools the majority. And given the current economic situation for many Main Street businesses, and the fact we are still amidst a global health pandemic that is drastically restricting normal economic activity, and yet the S&P 500, as one example, is at an all-time high: I guess I can’t blame the majority for thinking we are in a bubble. But are we?

I happened to nail the exit from a SPY (S&P 500) fund to cash in my 401k accounts right before the big Covid collapse in the markets. As luck would have it, I exited the day after the all-time highs, right before the enormous drop. My exact timing was lucky, but I recognized something bad was happening with Covid as I followed people who were closely following the global situation. I knew Covid was going to be much worse than most Americans expected, including our own public health authorities. BUT, I cannot brag about this because I missed the bottom by about 15-20%. That is to say, the market rose from its bottom by 15-20% before I reallocated my 401k back to SPY funds. Why did I miss that? And how does it relate to this whole discussion of a bubble?

I missed getting back in 100% at the bottom because I overlooked several things, including: (1) the disconnect between most Main Street businesses and the top Wall Street businesses; (2) the power of the Fed and low interest rates; (3) the willingness of “the market” to brush off the public health crisis, which was worse than most people predicted or expected; (4) the disproportionate impact of the top 5-10 companies in the S&P 500 on the value of the index. Similarly, I think the idea that we are in “a bubble” glosses over several important factors, including all four of the reasons I just mentioned.

However, in addition to that, I will go back to JC Parets’s blog post questioning if we are in a bubble, or if we have just started a new uptrend. Be sure to review his entire post for more details, but in summation: (1) the world’s largest company, Apple (AAPL), has been flat, consolidating, since the summer of 2020 and is just now breaking out to all-time highs; (2) the Dow Jones Industrial (^DJI) and Transportation (^DJT) Averages have done virtually nothing for three years, and beginning just last quarter began to break out; (3) Europe has done next to nothing for 20 years, and just started a potential breakout; (4) Emerging Markets have gone nowhere for 13 years and are now looking at a possible breakout.

So, bubble or new uptrend? We will only know in the rearview mirror, of course. But I think there is plenty of reason to be optimistic. And although I remain fairly pessimistic about the Covid situation in the United States, in particular, thinking it could get worse before it gets better (and I am entirely optimistic by the fall of 2021 it will be much better!), it is entirely possible the situations I mentioned above will lead to the market shrugging off 2021’s problems and looking forward to a “return to normal” by EOY. That doesn’t mean we won’t see some type of “correction” between now and then–the markets don’t always go up!!!–but it could mean we are not in a bubble, but simply in a new uptrend.

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