Great News! This Bull Market Is About to Collapse
By now, I’m sure you’ve heard that the East Coast was hammered by a Godzilla-sized snowstorm last weekend.
Ignoring the milk, bread and toilet paper, my wife and I loaded up on liquor, cookie dough and junk food in preparation of being snowed in for a few days. We made a list of all the movies we missed in theaters that are now On Demand. We took video of our dog spazzing out in the backyard.
All things considered, it was a pretty great weekend.
Then we were forced back to reality… and the 30 inches of snow that had been dumped on our neighborhood.
Which leads me to a bold prediction…
I can say now that I’m extremely bullish on the future of snowblower sales in the region. Because the cost of snowplow service has spiked to criminal levels.
My best friend who lives down the street was quoted $1,200 to have his driveway plowed on Sunday.
In all fairness, he does have a long driveway. But last winter, the cost was $150.
Demand drove prices into the realm of absurdity. Just think: You can buy two quality snowblowers for $1,200 – his and hers.
Most of the folks I know realize this and are content to wait. Let the temperatures rise above freezing, and the surge pricing will fade.
This certainly applies to what’s happening in stocks.
Fact is, all markets experience these crazy upswings – bullish movements that eventually price themselves out of existence.
Remember real estate? Home prices were supposed to gain 6% per year until infinity. It was madness.
Remember crude? Oil was supposed to stay above $100 indefinitely. I warned it was oversupplied in 2013 and would collapse. You could see the writing on the wall. And already this year, crude is down 20%!
And let’s not forget gold. Remember how it was supposed to go to $5,000 per ounce?
Now we’re looking at a brand-new bull market – one that has completely lost its grip on reality…
A bull market in negativity.
I wrote last week about how bullish sentiment has fallen to levels below the peak of the financial crisis. In fact, it’s fallen to the lowest levels in a decade.
Really? Is it that bad out there?
Now, admittedly, small caps on the Russell 2000 are in a bear market. They’re down more than 20% from their peak last June – and down 10.5% just in January.
Biotechs are in a bear market, down more than 27% from their peak last July. They’re down 14% since the start of 2016.
But just like their bull brethren, bear markets are self-perpetuating.
We can use Benjamin Graham’s theories to test the idea of betting against pessimism. Graham is considered the father of “value investing.” In the simplest terms, this is the idea of investing when negativity surrounding a stock or sector is high.
Graham’s famous proof of this was to create two portfolios: One with the lowest price-to-earnings (P/E) ratios on the Dow… the other with the highest P/E ratios on the Dow.
Expensive stocks – those with a high P/E – are en vogue, with lots of investor exuberance about their futures.
Cheap stocks – with a low P/E – are hated, full of negativity.
The results of Graham’s test were emphatic…
Over a 32-year period, a $10,000 investment in stocks with low P/E ratios grew to $66,900. An increase of 569%.
Meanwhile, $10,000 invested in stocks with high P/E ratios grew to just $25,300 – a 153% gain.
In other words, the most hated stocks on the Dow outperformed the most popular stocks nearly four times over.
At the moment, bearish sentiment toward stocks is continually increasing. The AAII Investor Sentiment Survey shows nearly half of all investors harbor a negative outlook toward the markets over the next six months.
Most investors make the mistake of selling when negativity is at a premium – instead of buying. Then they plow into stocks when optimism is at nauseating heights.
Right now, we’re in a bull market of negativity. Like all bulls, this one will eventually meet its end. But in the meantime, you should view investors’ rampant pessimism as a signal to buy.
About Matthew Carr
Matthew’s expertise ranges from classic industries such as oil and mining to cutting-edge markets like small cap tech, cannabis, 3D printing and cloud computing. With almost two decades of financial experience under his belt, Matthew’s knack for finding market trends never fails to surprise us, which is why we keep a close eye on his free e-letter, Profit Trends.