Riding the Type 3 Mega Market Melt Up Train


Beta-driven Fantasy

The decade long bull market run, aside from making everyone ridiculously rich, has opened up a new array of competencies. The proliferation of ETFs, for instance, has precipitated a heyday for the ETF Analyst. So, too, blind faith in data has prompted the rise of Psychic Quants… who see the future by modeling the past.

Gandalf, quant of Middle-Earth, dispensing sage advice. [PT]

For the big financial outfits, optimizing systematic – preprogrammed – delta hedges is an essential aptitude of the 21st century. Our guess is that many of today’s high-fliers will crash and burn during the next bear market. But what do we know?

As far as we can tell, the stock market, circa November 2019, is an absolute fantasy. The Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq have little connection to the underlying economy. Rain or shine, they go up.

Market watchers, eager to explain the fantasy, employ creative nomenclature as they attempt to classify the state of the stock market with discerning acumen. Is it a bubble? Is it a melt up? If it is a melt up, what type and gradation is it?

For example, Brian Sozzi, with Yahoo Finance, says the stock market is not in a bubble; we are merely experiencing a mini market melt up ahead of the holidays.  Savita Subramanian, chief equity strategist with Bank of America, has a slightly different take. She thinks we are facing a beta-driven melt up to close out the year.

The mother of all bubbles, monthly. [PT]

Do you know the difference between a mini market melt up and a beta-driven melt up?  Neither do we…

Thus, for fun and for free, we will attempt to deduce and classify the state of the stock market – both type and gradation – on your behalf.  We want to know precisely where things stand.

New Records

On Thursday the DJIA and S&P 500 both closed at all-time highs.  President Trump, an ardent market hobbyist, was quick to celebrate the new records, tweeting:

“Stock Market up big today. A New Record. Enjoy!”

Many good Americans celebrated too.  Take Barry McCockiner.  He was so grateful to Trump for this milestone he went to Apple Bee’s with his wife’s boyfriend and celebrated by pounding down a few beers.

However, those who bothered to ponder the delusion of all time stock market highs without an equally booming economy were less sanguine. Obviously, something has gone seriously awry.

Currently, the Buffett Indicator, which is the ratio of the total market capitalization over gross domestic product, is over 145 percent. A fairly valued market is a ratio somewhere between 75 and 90 percent. Anything above 115 percent is considered significantly over valued.

The market cap-to-GDP ratio, a.k.a. the “Buffett indicator” has risen into the blue yonder. This may explain why Berkshire Hathaway is sitting on more than $100 billion in cash. [PT]

The Buffett Indicator has only been higher two times: in September of last year, when it hit 146 just prior to the S&P 500’s 20 percent purge; and in March 2000, when it hit 148 …read more

Source:: Acting Man