Charles, this market is particularly difficult to fathom, both TA and FA wise. from an FA point of view many have adopted a cautious stance for a while now, as the market has left traditional extremes in valuation measures behind quite some time ago. when the market began to accelerate to the upside in '95, it satisfied at least most TA criteria for a healthy bull market in terms of internals such as NH/NL (peaked before the first big break in late '97) and the a/d line (peaked in april '98). after the swoon in '98 a difficult period began in terms of fully justifying the subsequent advance , as the aforementioned internals refused to confirm the new highs. in essence the rally has become much narrower, and the best performing stocks in it all exhibit speculative characteristics, with the nutz the ultimate bubble within a bubble. it was certainly not a rally to sit out though, as the stocks that did perform have delivered incredible returns in a very short span of time. the problem right now is that yet another measure, namely volume, has apparently peaked out in april and the narrowness of the market is even more pronounced. from the FA point of view another negative is discernible in the form of rising rates.
the fact that most indices have not violated important support, the skepticism generated by the recent correction and the fact that it's a mania all keep the bullish case intact to some extent. i wonder though how reliable contrary indicators like sentiment polls are at this point, since a sentiment change is possibly merely a sign that others have come to appreciate the very concerns mentioned above as well. judging from mutual fund cash levels it has become a habit of fund managers to stay as fully invested as possible,a result of caution having produced mediocre results in recent years. so the game lives from continued inflows and the explosion of online trading has introduced a new facet the effects of which are hard to gauge. clearly mutual funds have seen a drop-off in inflows, but online accounts may balance this somewhat. the problem with that is that since the explosive growth of D-I-Y investing is a fairly recent phenomenon, there are no historical precedents from which to gauge what influence this may have on the market's stability. so far so good, but what happens if and when the market suffers a more than cursory setback? we simply don't know yet. in many ways the market has progressed beyond the point where rational analysis is possible. it's now more or less a mass psychological event, a daily ritualized happening that has permeated society to a heretofore unobserved degree. the bulls basically insist that current excesses will be followed by even greater excesses on the grounds that the quantum leap in technology has brought on a new age of ever increasing productivity which necessitates a different understanding of the economics governing the current cycle. they reason that data which support the view that the economy is experiencing the first signs of strain are merely blips on the road to even more prosperity, and one has to admit that has been true for some time now. in an effort to make sense of this the academic world is sprouting new theories, some of which make extraordinary claims. there is for instance the one that holds that stocks should actually have no risk premium (or rather discount) and concludes that this would argue for an average S&P p/e of 100, in short, the Dow should be at 36,000 rather than where it is now. in that case the stock market's capitalization would represent a staggering 500% of GDP.
this urge to inflate targets for the stock market's valuation is highly reminiscent of past periods of excess.
so we know that a reckoning must be near - but when will it come? the mania has proven to be extremely durable and there is really no telling how much further it will extend.
one thing is for certain, it is fascinating to watch, and so will the grand finale be.
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