Investors’ Paradise and the Uneasy Professors

The stock market is up, bond yields are down, volatility is down and small caps have rallied, cancelling their previous divergence with high caps. This appears to be an investors’ paradise. But for how long will it last? Or does this question make sense at all?

The S&P 500 is now not far from its all-time high near 2120. Resistance should be expected but the way things are going and unless this is a bull trap, something that is possible but not highly likely, it should not take long for the index to get to 2200:

SPX_20150320

The yield of the 10-Year Note fell to 1.93% on Friday, well below 2% after falling nearly 20 basis points only during last week:

TNX_20150320

Volatility is dropping as prices rise. This has been a typical phenomenon in the last six years. Only last week VIX fell from around 16 down to 13. A fall below 12 may signal another bull market rally to even higher highs.

VIX_20150320

Is this a bubble?

A debate has started in blogs and social media whether this market is a bubble. We have professors against traders, traders against investors and fund manager against everyone. But who really cares? This is not even the right question to ask. Some of the proper questions are:

  • Do you have a plan in case of an adverse development?
  • What is your leverage and exposure?
  • Do you have currency risks? Are they hedged properly?

These are some of the hard questions. Professors like stuff, like “bubble markets”. In the markets there are no intrinsic properties just as in quantum mechanics. The idea of intrinsic properties belongs to the previous century. No market is a “bubble” but can become one if it is “observed” in a certain way that will cause it to implode. The important issue is how one is prepared to deal with that in case it happens. I do not expect professors to give a practical answer because each time they try their answers are wrong. Only “street types” know the answers and only they are the winners at the end of the day. Their solutions are simple but robust and they do not involve anything more than common sense. For example, if you hear the word “covariance”, run as fast as you can. You are being set up for a big loss…

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Disclosure: no relevant positions.
Charting program: Amibroker
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