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their emotions lead them into doing the exact wrong thing at the exact wrong time. And eventually, they will bid the market up to unsustainable levels before the whole thing comes crashing back down like a house of cards. As Edwin Lefèvre wrote about trader Jesse Livermore in his classic 1923 biography, Reminiscences of a Stock Operator. ..
S&P 500 Leading Into Final Booms
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Peaks we’d like to predict
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Moving average of 6-month returns
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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. That will never change. Look at as many charts as you want... But make sure you’re listening to what investors are saying, too.
The above chart shows the S&P 500 and its rolling six-month return... When the market really heats up, the two- year moving average blue line tends to spend some time at an elevated level. That indicates a “blow-off top,” or the end of the Melt Up. But as you can see, even with the market at new highs, we haven’t seen that yet. Some say the most dangerous words in investing are “this time it’s different”... That’s catchy, but it’s not precise enough to tell you anything. In one sense, every time is different. We’ve never had a nearly ten-year bull market with ultra-low interest rates, unemployment below 4%, massively profitable and fast-growing technology companies, and the specter of trade wars all at the same time. Of course it’s different. But what has never changed are investors’ mindsets. They are always driven by the same fear and greed. They are likely to let
Matt Weinschenk, CFA, is the house econometrician for American
Consequences contributor Dr. David Eifrig’s Retirement
Millionaire franchise. (For those who don’t know – and our editor in chief P.J. was one of them – an econometrician uses statistics and math to study, model, and predict economic outcomes.) At the risk of embarrassing Matt, we note that he has a 95% win rate in Dr. Eifrig’s Retirement Trader service.
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November 2018
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