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Stock Bubble: Wait for it to Pop

I'm going to start off today and show you what Fed policy has given us over the last decade and a half. What the Fed has accomplished has been one bubble after another.

Bubbles Chart

We are obviously in the final euphoric parabolic phase of a third stock market bubble. When viewed with the benefit of the 200 day moving average as a mean regression line, it's glaringly obvious just how dangerous this market has become. As history has shown, anytime the market stretches too far above the mean the forces of gravity eventually collapse price back to and often considerably below the mean.

S&P500 Index Daily Chart

Yet despite thousands of years of evidence that parabolas are never sustainable, investors invariably get suckered into buying into these moves and get caught when they inevitably crash.

This I can say with 100% certainty: this parabolic move in stocks is going to crash, just like every other parabolic move in history.

The smart investor will wait patiently on the sidelines and once the crash occurs the low risk trade will be to go long as the Fed will attempt to reflate the market. This is a virtually guaranteed strategy to make money, although very few people will have the patience to wait for the trade to develop.

The vast majority of traders will ignore the extremely risky environment because his emotions make him think that he is getting left behind. He will buy into the parabola assuming that it will continue indefinitely (does this sound familiar to the tech bubble and real estate bubble?).

History however has shown that this is never the case, and buying any asset this stretched above the 200 day moving average always turns out to be a gamble as to whether or not you can exit ahead of the crash. If you miss time the exit, and most people do, you end up paying a heavy price for following the herd into a trade that you logically know is too risky.

Once the stock market parabola collapses then the Fed's endless money machine will generate another bubble in another asset class.

I strongly believe the next bubble will be in the precious metals market.

 


If you are interested in following my work in greater detail, a daily and weekend report by subscription is available.

 

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