Where has the Wall of Worry gone?

Many old-timers, such as yours truly, describe solid stock market advances as climbing that famous wall – and there is usually plenty to worry about.  There certainly was earlier this year as fear of the spreading pandemic took hold of markets.  Whole societies were shut down as we faced house arrest ‘to protect the NHS’.

But then in late March, stocks rallied off deep lows and the reaction of many traders was to question if this was a ‘dead cat bounce’  or the start of another major rally phase.  After all, the early data on the scale of human lives affected was nowhere near on the scale of the Black Death or any other major plague that has afflicted mankind.

I had believed in the dead cat bounce scenario at first, but when markets refused to turn lower at significant Fibonacci levels, I realised that the cat was actually alive, unlike this Norwegian Blue Parrot.

And the public health data since then has supported the optimistic case that the economic damage caused by the pandemic would be much weaker than believed in March. And that growing confidence has propelled stock indexes to new ATHs as fears have receded and morphed into outright euphoria.

You see it in the MSM where there is much talk of a ‘new era’ in economic ‘progress’ after the pandemic will be soon tamed by the new vaccines, from all-green electricity by 2030, all electric vehicles by then, sightseeing trips into space around the moon thanks to Richard Branson, and so on.

The MSM financial pages are full of advice on what to buy for the coming new era as famous bearish gurus have been routed (especially if they have shorted Tesla!). Also, the put/call ratio in the S&P has dropped to the lowest level last seen years ago (ten years, to be precise).  Everyone wants to buy call options as they expect even more gains.  The cost of hedging with put options is so cheap, but nobody is doing it!

In addition, professional analysts are almost as bullish as all they can see is the huge momentum of ‘bullish’ news rushing at us from all directions.

For example, here is one piece of analysis that seeks to justify the huge P/E ratios now being paid by the bulls:

The cyclically adjusted price-to-earnings (CAPE) ratio extended its rebound from its March low, reaching 33.1 in November. Followers of the traditional CAPE ratio will regard the November level as high. They would be justified in doing so. Previously, the ratio has only been above 30 in the 1920s and in early 2000.

Adherents to absolute valuations pay attention solely to the current number. Those who use a relative valuation approach attempt to consider valuation ratios within context. For the CAPE ratio, one point of context is how it compares to bond yields.

To me, this is an extreme example of ‘confirmation bias’ where the analyst maintains that the established decades-old way of judging if the CAPE is excessive or not is wrong.  Sadly, even in the world of science, data is being interpreted to verify an end result fixed ahead of time.

Yes, bond yields are very low – and negative in many cases! – but is an investor really deciding whether to buy shares or bonds based on the paltry bond yields available?  Of course not – a stock investor is looking for capital gains on shares that have been orders of magnitude higher than bond returns, given that bond prices have been falling while shares have been exploding.

In any case. bond yields are finally starting to turn up – a fact much ignored by most analysts (we are short T-Bonds).  But as yields continue to rise (much against consensus), stock markets will have a Wile. E. Coyote moment of that I am sure.  It’s just a matter of timing now.

So all of this should be another major warning that this Paglossian vision lying directly ahead represents a bull sentiment high and where further large-scale stock gains are highly unlikely, especially in the tech high-flyers.

With the Dow having reached an ATH at a long-standing target at 30,000, are we near that turn?  With sentiment so one-sided, all respectable contrarians should be studying this picture

With the recent push up to 30,000 ATH, I now have a brand new set of tramlines with the upper one representing a solid line of resistance with six highly accurate touch points.  The lower tramline sports three accurate touch points to validate this pair as the genuine article.

But note the huge mom div going into the current high, which indicates the buying force is rapidly weakening as the new highs are being made.  That is usually a highly bearish portent – and is often the prelude to a major reversal.

So has the recent welcome news of the vaccines put the final touch to the decades-old bull market in positive sentiment of the social mood?  And has the out-of-sight Wall of Worry finally been scaled?  I have a strong feeling December will be a tumultuous month in many markets.