Dan, when I speak of the insanity of this market, I am NOT referring to the price levels of market indices!
I am referring to the signs that are obvious if you will look beyond these squiggles on paper - for example the mortgage loans and credit card loans that are being taken-out to put money into the market. I don't need any statistics to prove to me that this is happening, because I see it among people who I know. I find this more troubling than the increase in margin, which though it is GROWING at a high rate, is still at a very low level. The odd thing I am noticing is that people who will take out a credit card loan to finance trading are still deathly afraid of margin. Go figure...
The mania is everywhere, if you will look. People I know who have previously had no interest in the market are trading. They are doing it with little or no background or training. People ask me for advice, and I suggest a couple of basic books on investing. They won't read them - they just want tips. I try to give some basic technical analysis advice, but they don't know what a chart is, and don't want to. They just want more tips. I ask them why they bought a particular stock or why they sold it and they say "I don't know". And, you know what? For the most part they are making money.
This is mania. It has grown very significantly over the past 6 months, and accelerated dramatically over the past 3.
HOWEVER, let's examine your assertion:
"Sure there are a relatively small group of stocks that have outperformed the market by a wide margin, but the market as a whole is not outpacing its historical growth. "
Is that really true? Well, you go on to say:
"Nasdaq is going crazy because the index is capitalization weighted, and a few of today's hot issues are carrying it to lofty heights"
I guess it depends on how you define "the market as a whole". If you define that as, say the 10,000 (or so) stocks that make up "the market", you are right. But if you define "the market" in terms of capital, then you are wrong.
Ultimately, it seems to me, it's what is happening with the capital that is important, not what is happening with n stocks which are or are not participating. The non-participating stocks are of little consequence, because THAT IS NOT WHERE THE CAPITAL IS.
It seems to me that capitalization weighted indices DO provide the most accurate picture of what is going on.
You go on to say:
" If the market overall is going to fall into an extended decline, it will be the result of some global catastrophic event that affects the world economy, not because of an overextension of a few hot stocks everybody is chasing"
It matters little that it is only "a few hot stocks". The importance is in the last part of the sentence:
"EVERYBODY is chasing".
If EVERYBODY is chasing them, their impact can hardly be minimized by referring to them as "a few hot stocks". |
