SIGN OF A BUBBLE – HINT, IT ISN’T IN THE STOCK MARKET

I find this almost hilarious. Several well known commentators have come out with a recent piece warning that there is extreme complacency in the stock market, and a top is forming soon. They go on to suggest that one should protect themselves by buying bonds.

First off they are kidding themselves if they think there is complacency in the stock market. The ROBO ratio is still at levels usually only seen at intermediate degree sell offs. This is the ratio of retail put buying  to call buying. The most clueless traders are buying puts at a feverish pace. Does this sound like complacency?

On the other hand they suggest buying bonds. Bonds have been in a 36 year bull market. This has gone on so long that in most of the world we now have negative interest rates. Think about that. You are paying a bankrupt government for the privilege of loaning them money. This has to be the most illogical concept imaginable, and I would say a sign of the most extreme complacency, maybe ever seen in history. Yet these analysts feel that stocks are ready to collapse, so you should buy bonds.

Seriously you can’t make this stuff up. This is how illogical traders get during bubbles. Common sense just goes right out the window.

I have news for these guys, the bubble isn’t in the stock market.

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19 thoughts on “SIGN OF A BUBBLE – HINT, IT ISN’T IN THE STOCK MARKET

  1. zkotpen

    Steffmeister,

    Thanks for your comment regarding my Friday post. I am just suggesting there is a scientific approach to market forecasting, as there is to any natural or social phenomenon.

    So sure, Elliott’s patterns, the wave principle, are merely the first necessary step in laying down a scientific paradigm for market forecasting. But there are still more steps that need to be taken in order to establish a paradigm.

    The first step in scientific method, of course, is to define the problem, which Gary, others, and I have all done: Pattern ambiguity. Proponents or users of the wave principle will establish methods to deal with this ambiguity, without actually resolving it; opponents will discard the method altogether. Both sides deal with ambiguity in a pragmatic way.

    I, on the other hand, am a scientist, an Economist. And though I often struggle in practical affairs, I’m very clear on scientific method. The next step, after defining the problem, is to propose a hypothesis. That took me about six months, culminating last November. Then come steps 3, 4, and 5: Experimentation (first backtesting, then testing on data in real time), then analyzing data, and finally drawing conclusions.

    I will tell you straight away, the conclusion entails, as a minimum, completely rewriting the guidelines as they are laid out in Frost & Prechter’s “The Elliott Wave Principle”, such that they will make a huge step forward in pattern disambiguation. And the implications reach far beyond just people trying to make some income trading in financial markets. Most humans participate in markets, yet have little or no idea of how those markets work, and as a result, often find themselves in vulnerable situations when markets move in unexpected ways. Only after a scientific paradigm for market forecasting has been established can people be educated, with the aim of helping them better prepare for and cope with what are currently considered unexpected market turns.

    By the way, I call the project

    “The Swedish Venture” 🙂

    1. Gary Post author

      If the stock market could be reduced to a simple fractal pattern don’t you think some massive hedge fund or bank with a research dept. full of quants would have programmed their computers by now to never have a losing trade?

      LTCM thought they had discovered the secret to the market.

      Keep dreaming…

      1. ras

        Analysts tried everything: expert systems, fuzzy logic, neural networks, pet theories based on heuristics, etc. They may work for short periods of time and then fail miserably. Markets, by nature, are dynamic and what worked in the past may not work in the future. A good way out of this predicament is to take one day at a time and trade what you see.

    2. Steffmeister

      # zkotpen

      haha Why The Swedish Venture? Ok, I do not know were to start. Ancient knowledge is forgotten, at least in the west. We are at the end of an ancient cycle right now. I guess thats why we are seeing a great deal turmoil in the world right now.

      There is a lot of esoteric knowledge about investing and trading that is not commonly known. Mother natures own cycle is one of them. Cycles come and go, they extend and contract and sometimes they flip and invert. Thats why Bo Polny is out of bounds with his calls every now and then.

      I think Jesus Christ himself was a cycle, he was never a person, he was an abstract metaphor for a cycle. Often referred in the Bi-ble as 12 or 30years like 12months in a year or 30days in a month. He died and resurrected just like the day dies and turns into night and then a new day is reborn.

      The earth orbit around the sun a pretty wide circle isn’t it and a circle has 360degrees and a year 365days pretty close but if you sum pre julian calendar with the gregorian calendar you will end up with 360days for a year. Patterns of 360 is represented in cycles, charts and events around the globe. 360 is 90degress times 4. A straight angle, add 90 (close to fib 89) from panic 1837 we end upp at 1927 close to 1929, add another 90 years to 1927-29 we end up at 2017-19, that is imminent. Do we all feel something in the air? A major financial event lurking in the background? The time swirls spirals is flowing from history into the future. I will not be around when the circle is closed in 2017-19+90=2107-2109. I am sure there is a financial event attached to it.

      Fractals is the pattern of the universe, it is designed by the ratio of 1.618 the golden ratio. Your arm, hand, face and fingers has a fractal design with the ratio of 1.618, so why not charts. All charts are created by humans, but every human has an individual design close to fib ratio just like charts.
      There is a beautiful multiple 1.618 ratio present in the Gold-chart right now 🙂 mind boggling isn’t it !

      There is so much more and I’ve only started to scratch the surface …

  2. JoeCool02

    Since you think the bond market is in a bubble, do you think it will take down the housing market when it pops?

    1. Gary Post author

      Hmm maybe, but bonds tend to turn very slowly so it could be years before rates rise enough to do any damage.

  3. zkotpen

    Gary,

    People said the same thing about Mendeleyev playing solitaire with his “element cards” on long train rides across Russia. Copernicus had to wait until the year of his death to pass off his manuscript to the publisher. Galileo was outcast. Socrates was forced to drink the hemlock. I’m well aware of the massive resistance against new thinking. In the modern era, Kuhn made it clear how that works in the 60’s with the structure of scientific revolutions. Eliyahu Goldratt brought Western Manufacturing out of the dark ages of “cost accounting” with The Goal and subsequent work. He also outlined the different levels of resistance to new paradigms.

    Sure, mathematics is required, but nothing moves forward without an hypothesis. That hypothesis is, as you state, a dream. as was the periodic table of the elements, or “gravity” or even oxygen at one time. And then today, people take all of those scientific discoveries for granted. So the next generation version of you — let’s say “Gary Jr.” — will find a pragmatic application of pattern disambiguation after it’s established and generally accepted — that’s when all the doubters will, as Goldratt states, “suddenly develop amnesia” regarding their doubting — better put, their extreme incredulity. Goldratt also makes it clear why business people don’t make discoveries — pretty much what you suggest — too much data mining and crunching, in lieu of scientific method. To be perfectly honest, even back at Uni, I intuitively felt the hordes of business majors in Econ classes kinda got in the way of the task at hand, without contributing to the science at all.

    Conversely, that’s also why I’m so tight-lipped about my hypothesis: I don’t want some pragmatist to get it, then kick me to the curb once they’ve got a handle on it. I just want to do my research as well as I possibly can — and also make some profit on it — hopefully before somebody else stumbles on the same thing. After all, Priestly also discovered oxygen independently, around the same time as Lavoisier.

    As for the math — Black-Scholes is a far more fancy equation than I can ever come up with — but even they admittedly have a massive hole in that bucket: They are unable to “quant” volatility. And they made it to Sweden 🙂

    At any rate, somebody on SMT premium was talking about using 12 or 10 day SMA’s for precious metals back in 2013, because the PM’s had “shorter cycles than stocks”. That sent me down the wrong road for a while. Then you started talking about the 200 day SMA last fall, so I figured I’d look at things thru that lens — you’ve probably forgotten by now, but I thanked you for drawing my attention to it, back in late November or early December.

    I may even give your premium subscription a try again after a two year hiatus. After all, it is a bull market, which is what you’re good at. And you are a pragmatist — which is certainly an area where I need all the help I can get!

    Cheers!

  4. chrisG

    Where’s the idiot who says not to buy IBB? Where’s the imbecile complaining about Gary’s IBB or Labu at the lows?

    1. Gary Post author

      I was going to say the same thing. I think it’s about time those trolls come back and admit I was frighteningly correct on my biotech call.

      They missed another chance to buy low.

      It just never changes.

  5. jhmoffett

    Gary — would you add significant new money to stocks here & now, or wait for DCL pullback first?

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