Market Analysis

When Bulls Go Wild

Once upon a time, a long long time ago in markets far away, stocks actually went down on occasion. Soon, next week actually, we’ll see headlines that we’ve entered the longest period in history without a 5% drawdown. When bulls go wild you get charts like this:

FTSE All World Index $FAW:

And when stocks don’t go down FOMO (fear of missing out) happens. People throw all caution to the wind and when they do you get stats like these:

Retail keeps piling into equity funds via passive investing like there is no tomorrow. $58B of record equity inflows in the past 4 weeks. FOMO at its best. In the meantime “the average cash balance of fund managers fell to 4.4% in January, a five-year low, according to BofA. And hedge funds, which have also been cautious on stocks, recently increased their stock market exposure to the highest level since 2006”.

The boat remains fully tilted in one direction.

When bulls go wild there is no stopping them until the momentum breaks. Such moves are not new.

Indeed periods of optimism have happened plenty of times before:

And the period of optimism has charts to match. Here is that period from 1929:

Up, up and away until it stops:

1987 was no different:

Until it stopped:

And then the next boom cycle begins. The final phases of these optimism and momentum driven runs are the ones that are particularly reason defying and aggressive.

That’s what FOMO does and so you get relentless moves like the $NDX in 1999/2000, 87% up between October and March:

Does all this optimism and price momentum have any predictive value of future returns? History suggests it doesn’t:

What have all these charts above have in common? One principle factor aside from price steadily trending up: Stocks appeared bulletproof. Until they got shot with little warning and momentum shifted.

Oh don’t get me wrong, I’m not calling for a crash, I can’t even call for a 2% pullback as even those don’t happen anymore. But, to be fair, an aggressive price reversal wouldn’t surprise me either at some point.

But for now price only goes up along a very steady path as bulls go wild and buy any tiny miniature dip:

Steady as she goes until there’s smoke:

Allocation data and equity flows keep suggesting everybody is in the building and there is only one exit. But maybe it’s different this time.

Go wild bulls.

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