5/30/17 Comments

I updated watchlists in the High Growth Stocks area. I haven't posted for a while. I was taking care of some medical issues. Also, the market has been confusing. It has been acting strong for high growth stocks. Just a look at a few of the leaders shows them to be extended: LRCX, NVDA, VEEV, BABA, WB, NFLX, etc. This has been the best performing time for growth stocks in years.

That being said, the eerily quiet volatility is concerning. In the 28 years that the VIX has been published, there have been 13 days where the VIX closed under the value of 10. The chart below shows these days. Also shown is where the market was one year after the indicated period. Essentially, really quiet volatility doesn't portend a strong future. One year may not be the best period to illustrate this behavior. The 1993/1994 dates led into what I call a stealth bear market of 1994. In this period, growth stocks did not work at all. The market shot up again in 1995.
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We have had something like the 1994 stealth bear market recently for growth stocks, perhaps that is why they are working now. More likely in my mind, we may be in or starting a blow-off period. Blow-offs such as 1999/2000 and September/October 2007 can precede bear markets.

Investors have moved in droves to passive index/ETF investing. Active investors who comb the market for value have underperformed. Passive investing has become a crowded trade in my mind. Crowded trades don't last forever. When you consider that 30% of the small-cap universe shows no earnings and the WSJ reported on 5/26 that the small caps show a P/E of 81.5, you can believe that investing in a small cap index rewards a lot of dogs equally with the stars. This represents a misallocation of resources. As long as passive investing rules, value seekers might as well go on vacation. Passive investing also tells me that the market is probably dangerously correlated. Correlated Markets can lead to prompt drops from external shocks where no-one is willing to place a bid and the algorithms shut down.

So, I am fully long and doing well, but concerned that we could see overnight gap downs from external events. Eventually, valuation will matter.