Bullish theme intact

US stockmarkets just keep trading higher. The Dow Jones, Nasdaq and S&P 500 are regularly setting record highs despite predictions that it will all end in tears. It will, but when?

Not yet, reckons Lance Roberts, chief portfolio strategist for STA Wealth Management. "Accomodative" Fed monetary policy and relief at the Scottish referendum result only add fuel to the fire, he says in a research paper "Over Bought, Extended & Bullish".

He writes…

This "relief" put enough upward pressure on the markets to create a short covering push that drove the S&P 500 to new all-time highs and pushed the markets into further overbought, extended, bullish territory. When I discuss this, I am often asked exactly what is meant by such a statement. This week, I am going to provide a basic course in technical analysis as the "overbought, bullish and extended" theme is likely to remain intact for several months to come.

(Click to enlarge)

Currently, the price extension of the market, relative to its long-term moving average (three-years), is at a level greater today than at the peak of the market in 1999.

This observation has not gone unnoticed, and there have been quick snaps by the "bullish proletariat" that the current environment is in "no way" like 1999. But in reality there are indeed many similarities. In the past couple of years, we have seen similar surges in the number of companies with negative earnings being IPO'd, massive increases in margin debt levels and share "buybacks" driving earnings.

However, the "bulls" are right - while there are indeed similarities between the current extension of this bull market cycle and that of 1999, they are indeed different. However, all market bubbles are different. Throughout history, there is not one asset bubble that is like any of the others. They have all been different, but they have eventually all ended the same. This one will also - leaving only two questions that must be answered: "when" and "what will cause it?"

Sorry, I don't have an answer for either. And no one does.

This is why we must realise a couple of things.

1. We are in a "momentum" driven market which means that "fundamentals" have less importance at the current time in the "buy/sell" decision-making process. This will not always be the case; it is just the case right now.
2. When markets are being driven by excessive optimism and "greed," the "trend is your friend" until it isn't.

This is why, despite my ongoing concerns about the market overall, the portfolio model has remained primarily fully allocated all year. Price has only been moving in one direction - up. The chart below shows that (third highlighted box) since the onset of QE3 by the Fed at the end of 2012 corrections in the market have consistently become smaller and smaller.

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This conforms to a pattern as identified by John Hussman as a "Log Periodic Bubble" to wit:

"A log periodic pattern is essentially one where troughs occur at increasingly frequent and increasingly shallow intervals. As Didier Sornette has demonstrated across numerous bubbles over history in a broad variety of asset classes, adjacent troughs (say T1, T2, T3, etc) are often related to the crash date (the 'finite-time singularity' Tc) by a constant ratio: (Tc-T1)/(Tc-T2) = (Tc-T2)/(Tc-T3) and so forth, with the result that successive troughs come closer and closer in time until the final blow off occurs."

The wait continues.

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.