Bottom Fishing
I think a nine-year bull market does something to investors. It gives them the false sense of security that buying on sell offs or dips is how to invest - that every market downturn is a buying opportunity. For the most this has proven to be an effective strategy however, the current market conditions are forcing me to question the validity of this investment strategy.
A couple pieces of data I pulled together:
The PE of the NDX is 67.24
23 of the 100 stocks in the NDX don't have earnings
The PE of companies with earnings on the NDX is 87.32
There becomes a time when the market is fundamentally overvalued and the momentum driven by market hype ends. I think that time is now.
This is what I see happening in the short to mid term: Every market dip sees new investors "bottom fishing" which in turn gives a temporary bottom and rally. Each rally has been met by selling (which I believe is from international investors exiting stage left - which is an entirely different conversation) New lows are reached and every "bottom" locks up additional investor funds. The small investor holds because time and again "buy the dips and hold" strategy has prevailed.
The BIG flaw is that every rally and sell off locks up potential capital, and decreases available funds, equity, or margin.
The total pool of investor capital is decreasing. IMO this market will continue to rally and sell off, each a lower low and a lower high.
bigcharts.com
I am pretty confident that on this sell off (started Nov 15th) the NDX will pass below 2700, then rally somewhat shy of 3,100
In addition this market will continue in a downtrend until capitulation.
CAPITULATION: The day in the market, preceded by a string of steep down days, when longs throw in the towel and sell their positions because they believe the market is going to hell and they have to save whatever they can. The one day when the advance to decline ratio is off the charts and every ma, pa and trader joe sells their positions to protect them from the impending doom. All this is summed up in a simple word - Panic.
However, that day will be the end of the doom and the market will be up from there. Let us not forget the driving force behind the market - corporate earnings. And corporate america is far from dead or dieing - its just a little overvalued.
All IMO |
