Who Will Be Swimming Naked When the Tide Goes Out?

The comments below are an edited and abridged synopsis of an article by Dohmen Capital

Record levels of speculation in different areas of the financial markets have produced an ‘everything’ bubble, at minimum matching that of early 2000.

Who Will Be Swimming Naked When the Tide Goes Out? | BullionBuzz
Woman bathing suit hanging on a pine tree branch at the beach in the golden hour at sunset time. Vacation, summer and nudist camp concepts.

The internals haven’t followed along with the current rally in stock prices. Investors seem fine with watching a handful of America’s largest mega-corporations rocket to new highs, pulling the broader market behind them. To maintain the same growth rate in the indexes, however, the FAANG stocks have had to pull more weight.

The true internal market top appears to have already happened, on June 8. Most stocks reversed course on or around that date and are still below the levels they reached in June.

The largest and most profitable tech companies won’t keep inflating the indices for much longer. The NASDAQ’s daily chart shows it has met resistance three times at the trendline established just before crashing earlier this year. Momentum is sputtering.

Why has there not been a second major decline in the major indices? The answer is in the rotation into cyclicals. On slow days for the FAANG stocks, airlines, cruise lines, oil producers and other cyclicals have kept the indices moving.

Global stocks, however, are overvalued by nearly every metric, real interest rates have gone negative, gold and silver have been flooded with speculative trading, and even housing prices have hit the highest levels on record. Investors should be cautious heading into the fall months and into the November election.

Warren Buffett once said, “When the tide goes out, you see who has been swimming naked.” He was referring to a bull market turning into a bear market. That is when the bull-market-wonders, using excessive leverage, are exposed. The number of such disasters in this bear market will be record shattering, at least in the amount of dollars lost.

Investors who believe there will be a V-shaped economic recovery and a continuing bull market may be disappointed. In technical analysis, prior highs are strong resistance. We are already seeing signs of a bear market rally top. Now is the time for investors to evaluate their investment strategy for this current market setup.

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