THIS ARE ALL GREAT COMPANY’S THEY CAN ONLY RISE IN VALUE, RIGHT?
Looking at the chart above you can see something interesting.
While Corporate’s are making no advantages in profit or even slightly less, the SP500 Index and the underlying equities are trending higher in Value.
HISTORY DON’T ALWAYS REPEAT ITSELF BUT….
there is a not deniable fact that we have seen such a state of the market in the past. Especially the Dotcom Bubble had similar developments in Corporate Profits vs Equity Prices. A few years later CP peaked and dropped before the actual Housing Market Crash occurred.
No doubt that the rising divergence between the CP and the SP500 Index is something every Investor or Trader should be aware of.
OK, THEN I´M GOING TO SHORT THE WHOLE THING! IT CAN´T GO WRONG, THIS IS DEFINITELY A BUBBLE!
Being a Stock Market Bear in the biggest Bull-run in history is kind of lunatic but also buying shares at this prices is maybe not the best entry.
Having the ability to see when something is overvalued or in a Bubble -Hype State is something not even the best Fund Managers at Wallstreet cant do. The Truth is, most or many of the best Fund Managers or Professionell Traders on the biggest trading floors missed to enter this rally early enough or got hurt Short-selling it.
DON’T UNDERESTIMATE HOW LIQUID THE MARKETS CAN STAY…
and there is a lot of liquidity coming day after day into this market. You probably heard already something about the current „Repo – Operations“ the US Federal reserve is currently doing.
Short spoken the also known „Repo – Madness“ is basically the FED lending out Money to Banks for their overnight operations. And they are lending out a lot.
If a day ends in „y“…. pic.twitter.com/IxFgLaX2bB
— Sven Henrich (@NorthmanTrader) January 22, 2020
Original Tweet from @Northmantrader
You have to make up your own opinion about it. But it is some funny coincidence about the movements in SP500 value and the REPO Operations at the same time.
FURTHER LIQUIDITY FROM CORPORATE BUYBACKS
Another interesting data showing the cumulative Buying/Selling of equities. Which negates the theory that only banks are the main reason why equities are rising in value because we have definitely more non-financial corporate involved in trading equities.
Rising corporate buybacks with less interest from households and financial institutions may tell you that current equity valuation is not based on true demand.
OK NOW I´M CONFUSED AND WORRIED, WHAT SHOULD I DO?
Lets sum this up.
- Divergence in Corporate Profits and Equities valuation
- Fed Repo operation with short term liquidity injections for price stabilization
- Big Corporate buyback interest while households and financial institutions are interacting less with equities.
At some point a random factor could break liquidity flow leading most of the equities to a value correction.
Holding your equity investments during a market correction can be quite painful and on the other side having cash ready on the sideline while also having the patience to wait for a correction might be the right way to get some equities of your choice much cheaper and profit from their healthy development after a re-valuation in the future.
DO THIS INSTEAD
- Learn about market cycles
- Learn to hedge yourself against the Trades/Investments you made.
- Stay up to date about the economy statuts (e.g. what is the FED or the ECB doing)
- Follow the US-Dollar Index and Gold Spot Price.
- Be aware that different sectors of the market can, but not always have to move together.
- Do research about the equities you might want to acquire in the future
- Don´t take mainstream media as some investment advice
- Follow other traders & investors and their opinions but make your own!
- get a professional financial adviser