The Total US Stock Market has rallied to the top of its price channel and into overbought conditions. During this rally, the market has worked off previous overbought readings through mild corrections and sideways patterns. Will it repeat?
The main driver of this market is not positive earnings growth or the economy. It continues to be the flow of funds into the global financial markets by central banks printing money out-of-thin-air to monetize the markets.
While the mainstream financial media point to earnings growth they seem to fail to look at history or beyond their own headlines. Profits (GAAP) today are about where they were in 2012. On the other hand, corporate debt has far surpassed any pre-recession level in terms of SP500 corporations abilities to pay from those same earnings.
While I cringe at the thought of having exposure to the largest central bank credit-driven global bubble in history, our key indicator still signals all clear. And why shouldn’t it, the ECB and BOJ are still monetizing the markets. Our own Federal Reserve is six years behind the power curve in raising interest rates and remains below inflation levels.
What our indicator can not foresee is one of the many black swans circling landing at any time. Thus, I recommend remaining somewhat defensive and not heavily allocating to stocks or high-yield bonds.
Will you miss out on some of the terminal phase gains? – Yes. But for those aware, they will sleep better while invested and be ready to exit when this credit cycle ends.
Be careful out there. Investing in bubbles or missing out is not easy.
Invest Safe, Invest Smart.