The stock market is a never-ending marvel. It never ceases to amaze new students and long-time observers and analysts alike. It has captured my interest since I was ten years of age when my late Uncle Sydney showed me how to read the Wall Street Journal.
While the securities business and stock trading has changed dramatically over the 50 years I have been involved there have been some constants that have marked tops and bottoms if you look close enough and learn to be flexible.
The U.S. stock market has been in a secular uptrend since the end of 2008/beginning of 2009. A secular uptrend comprises a number of cycles to the upside. There was a secular bull market from 1982 to 2000 where the DJIA rose some 1,400%. This current secular uptrend has further to go after this medium-term top runs its course.
A Kitchin cycle of 40 months, well researched by Joseph Kitchin back in the 1920s, and the later work of Joseph Schumpeter does not make it into typical Wall Street research reports. P/E ratios and valuation models are the norm. But cycles exist nevertheless.
What do we observe at cyclical highs?
1. Stocks will reach levels of high valuation relative to earnings. Check.
2. Sentiment about stocks will be frothy. SPAC anyone? Check.
3. The number of IPOs increases and their "stories" are less compelling and earnings are less visible. Check.
5. A mentality of "buy the dip" (or put writing) becomes prevalent. Check.
6. The breadth of the rally narrows down to a handful of outperformers. Check.
7. If we ever get to go to an in-person cocktail party again and someone asked about the latest IPO of a Chinese technology company. Check
We can usually spot these markers better after the fact, but they are there in real time as they unfold. Each market cycle is a little bit different so that is when experience becomes a valued asset.
In late August/early September the major indices and averages here and around the world were making medium-term tops.