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Don't Be Fooled by the Stock Market Relentless Rise

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In the world of stocks and shares sentiment plays a big part in the valuation of a stock. The basic relationship is that when stocks are expensive and sentiment is bullish stocks become dearer, and when stocks are cheap and sentiment is bearish they become cheaper. Remember the merger between AOL and Time Warner in 2000 at the height of the tech bubble (the biggest merger in U.S. history), and more recently Yahoo’s purchase of Tumblr for $1.1bn and Twitter’s IPO valuing the company at $18bn. I wonder if there are any similarities between 2000 and 2013 and if the stock market is in bubble territory? A recent article from Market Watch says so:

© Image copyright sookie

Tech valuations stir memories of 1999

Back in 2000 Time Warner was overvalued but it seemed like a good deal at the time. It wasn’t until after the technology bubble burst that people realised AOL had paid far too much. In periods of extreme optimism, what is expensive is often seen as good value.

I am not going to speculate on the future of the Twitter stock price, suffice to say the verdict will be given when the stock market decides that it’s time to be sensible again.

There is no doubt that we are in a period of extreme optimism. I have a reliable formula for sentiment; by taking the earnings per share, forward P/E ratio and beta for each stock quoted on the stock market,  I can tell you where the stock market is headed in the short term. I won’t discuss the long term outlook because there are too many potential constraints that could derail the forecast, so I leave this task to city analysts. In my view forecasting the short term direction is a much safer bet.

I must warn you though I don’t have a crystal ball. I may get it wrong from time-to-time but overall I am more often right than wrong. Occasionally the Fed will trick me into doing the wrong thing, but everyone knows the Fed is manipulating the stock market and there is nothing we can do. It is just an episode in the history of the stock market and when the manipulations end the game will be up.

Long ago I learnt a technique to forecast the stock market. This technique has stood the test of time and the advantage of it is that even if the manipulations continue, this technique will continue to work. You see there is nothing new in the stock market and as the late great Jesse Livermore once said over a century ago:

There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again

So next time someone says to you “this time is different…” buyer beware!

The conclusion here is that what happened before 2009 will almost certainly happen again and as the scout motto goes we should – Be Prepared! Already we are seeing a repeat of past mistakes.

City AM reports: “Credit doubles as Britons go on a debt binge”and then adds: “The economy is recovering, but it is impossible to be optimistic about the viability of this rebound”.

Debt recovery specialist Begbies Traynor reported: “with pay growth still lagging behind inflation, this consumer-led improvement could have worrying consequences for the wider economy as new research from the British Bankers’ Association suggests that this resurgence is being funded by a rise in household credit, which has increased for the first time in four years. With rising property values prompting still more consumers to increase borrowing, even amid fears of an imminent housing bubble, we are reminded of the boom years prior to the economic downturn of 2008, and hope that this is not a sign of UK consumers repeating past mistakes.

Meanwhile The Wall Street Journal warns: “Deflation fears rise in Europe”.

At the same time money is pouring into mutual funds:“$277 billion into stock funds so far this year; highest since 2000”says Market Watch.

But the Fed is trapped, Daily Telegraph reporter Liam Halligan writes: “US policymakers are caught in a trap – a seemingly inescapable dilemma that stems directly from the massive scale of QE

 

 

With the US debt ceiling debate resuming in January and the departure of Fed Chairman Ben Bernanke, December will be an interesting month and one that could be full of surprises. In the meantime the stock market rally still has legs, at least until December.

Thierry Laduguie is Market Strategist at www.bettertrader.co.uk

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