Wednesday, November 6, 2013

Implication of Divergence on the Broader Market

U.S. stock market has been performing very well for the past 4 years. In fact, this is one of the fastest/least loved Bull markets in the history of the U.S. indices. It is not loved because people continuously doubt it due to divergences that appear from one sector to the other sector. These divergences can through-off investors from looking at the primary trend. Thus, creating a wall-of-worry which bull market can climb. 

Some of the biggest examples of these divergences since 2009 include:
  • The divergence between unemployment rate and stock prices
  • The divergence between housing recovery and U.S stock market rally from 2009 to 2010. 
Therefore, divergence themselves are not a reason for concern, but are rather something to look at and keep in mind for clues about up-coming trend.

As far as the overall market is concerned, we have been hearing a lot of talks about another stock market bubble. This bubble is attributed to several high-flying tech names which are rallying like late 1990s. Twitter IPO is another much hyped entry into the stock market, which is increasing fears about the presence of a bubble. And the reason behind this bubble is linked to Fed's ultra-accommodating monetary policy.

Another sign of a potential tech bubble is that last year Harvard Business School's MBA class heavily favored to join start-ups in comparison to Wall Street. This highlights the extreme lure that these companies are carrying at this point in time. 

Although sharp rise in high-flying stocks is a source of concern especially at a time when economic mainstay industry like housing sector is diverging from the broader indices, it does not guarantee an immediate decline in the stock market. We might be right 2 years from now, but stock market investing requires accurate timing aspect, if one wants to make successful investments. Furthermore, bubbles typically do not pop when everyone is looking out for them. They pop when the majority embraces them. And according to a latest research, wealthiest Americans have not embraced the stock market bubble. In fact, they are still cash heavy in their portfolios.

In regards with market timing and next move, it appears that market has enough juice left even with all of the above concerns to make new highs. Seasonality is in favor of higher stock prices at least till next year. UST team has already published Weekly and Daily IPM Model turn dates for subscribers. These dates would be very interesting because it seems like the market is getting ready to rally into these turn dates. 

A rally into these turn dates would help further develop the case for market divergence. And by that time bubble discussion might subside giving way to mainstream acceptance of the high-flying tech stocks. At that point, it will time to become scared. 


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