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posted on 03 October 2017

Bull Market In Complacency

Written by , Clarity Financial

With the understanding that we are currently invested in the markets AND that we apply risk management to our portfolio strategies, let me just say this:

“At some point in the not-so-distant-future, a day of reckoning is coming. The next bear market cycle, when it occurs, will be as devastating as the last two as valuations once again revert beyond the mean."


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The timing, and trigger, of that event are unknown.

I wish I could tell you it was going to be June 22, 2019.

But I can’t. Nor will I try.

However, I can tell you it’s coming.

The chart below shows the market on a monthly basis. Each time historically that markets began to push 3-standard deviations of the long-term mean corrections were often nearby. The difference between a correction within an uptrend, and a full-fledged bear market, were closely coupled to excessive levels of valuation and a high-level of investor complacency.

At nearly 30x earnings - the key ingredients of valuation, excessive deviation, and extreme complacency are present.

As Doug Kass penned last week:

“At this time 85 years ago, Yale economist Irving Fisher was jubilant. ‘Stock prices have reached what looks like a permanently high plateau,’ he rejoiced in the pages of the New York Times. That dry pronunciation would go on to be one of his most frequently quoted predictions - but only because history would record his declaration as one of the wrongest market readings of all time. " - Time Magazine, The Worst Tip in History

The Fast Money panelists are giving a host of reasons for the near-epic lack of market drawdown in 2017. Respectfully, I will repeat my reasons - which differ from the general views that progress of the domestic economy and corporate profits are great, an orderly rotation is occurring, that there is hope for regulatory and tax reform, etc.

From my perch, stocks continue to be buoyed by some of the following conditions:

* Massive injections of liquidity from the world’s central bankers

* Passive investing (quants and ETFs) are now dominating markets (at nearly 40%) - at the margin (There are now also more ETF’s than

* Machines and algos - as well as many individual investors - are behaving differently as they are now programmed and conditioned to buy the dips

* 17% of the listed shares outstanding have been retired in corporate stock repurchases since the Generational Low in March, 2009.

* More than half of the listed companies on the exchanges have disappeared over the last eight years

We have a “Bull Market in Complacency"

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