How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?– Alan Greenspan, December 5, 1996Over the past decade, it has been an uncomfortable lesson to accept that investors can be relied on to behave in ways that are ultimately unsustainable and destructive to their wealth, as long as market internals are temporarily supportive. It’s one thing to say, “From every historical precedent, we know that this is going to end badly, and investors will lose a great deal of their wealth, but for now, they are speculating anyway.” It’s another thing to add, “and since they are, we are actually going to rely on investors to continue behaving dangerously, and join them.”– John Hussman, “The Rubber Hits The Road”, March 8, 2010
NOTE: Every week I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a 24-48 hour delay from time to time. Here is this week’s.
I was reminded of Alan Greenspan’s famous “Irrational Exuberance” speech by a couple items this week. The first was the appearance of tech bubble cheerleader Abby Joseph Cohen on CNBC Tuesday morning. Cohen said fair value for the S&P was between 1250-1300.
The second was a fascinating Weekly Market Comment by John Hussman “The Rubber Hits The Road”. The thing that caught my attention from this piece was Hussman’s claim, based on extensive quantitative analysis, that the stock market has become increasingly speculative over the last 15 years. Trends, technicals and market internals have played a far greater role in driving the market since 1995. Valuation and fundamentals have declined in importance. This coincides nicely with Greenspan’s 1996 speech.
Returning to the present, the bull market celebrated its one year anniversary on Tuesday and is approaching its recovery high of 1150. Just last Friday I suggested that the S&P was probably in a range defined by the recent highs and lows between 1050 and 1150. Almost before the ink dried on the page, however, the S&P was pressing up against 1150 having closed yesterday (Wed 3/10) at 1146.
As I pointed out last week, volume has been pathetically weak during this five week rally. Nevertheless, if the S&P can convincingly break through 1150 it would suggest another leg up in this relentless bull market. As Hussman writes, we know this will end badly in the long term, but perhaps it makes sense to participate in the madness in some limited way for the short term given the fact that financial markets are now indistinguishable from casinos.
I’m not convinced that will happen because 1150 is substantial resistance. Either way, we should see some kind of resolution in the next few weeks.
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