Katie Lance
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Katie Lance in Economics & Politics,

Everyone is a genius in a Fed-induced stock rally

Don’t confuse brilliance with a bull market

Bloomberg

Bullish stock investors are feeling invincible.

For example, I recently received a taunting email from an investor who is 100% convinced that the Dow Jones Industrial Average DJIA, -0.68% will hit 18,000 by January because author and professor Jeremy Seigel said so. This investor advised me to buy mutual funds or stocks so that I do not “miss out on the rally that is certain to come.” Really? A 5% gain is possible but hardly certain.

At market tops, it is common to see what I call the “high-five effect” — that is, investors giving high-fives to each other because they are making so much paper money. It’s happening now. I’m also suspicious when amateurs come out of the woodwork to insult other investors.

There are other signs of irrational exuberance. Two analysts from Morgan Stanley predicted the S&P 500 SPX, -0.58% will be at 3,000 in five years, a 50% increase. Most people can’t predict what the market will do in a day or a week, but these analysts can tell you what will happen in five years. Good luck with that.

Also, the number of bears surveyed at Investors Intelligence remains at historic lows (15.2%). And then one clown proclaims in a column, “This is a Market that Will Never Go Down!” For those who didn’t read my previous column , I am that clown, but I was being sarcastic. The scary part is that many people actually do believe this market will never go down.

No bad news for the bears

I’ve noticed that many long-time bears are capitulating. If you look at market history, when bulls feel invincible and beaten-down bears give up, you have the makings of a market top.

Need more evidence? Although the Dow has made all-time highs, the Russell 2000 Index RUT, -0.94% is below its 200-day moving average, a potential red flag. In addition, 47% of the stocks in the Nasdaq Composite Index COMP, -0.42% are down more than 20%, a signal that smaller-cap stocks have been topping out for months. Finally, during the second quarter, “stock buybacks have fallen year-over-year for the first time since 2012,” says Barron’s. Stock buybacks have helped support this market.

Yet at the moment, the Fed appears to be in control, and they will do everything in their power to keep the market from sinking. In fact, the Fed has injected itself into the market in a major way. Chairman Janet Yellen has made it clear she will keep interest rates low for a “considerable time” and will use whatever tools are necessary to keep the market stable (i.e. levitated). Most investors believe the Fed will protect their investments from any and all harm, but that can’t go on forever. When the Fed attempts to extricate itself from the market one day, that’s when the music stops, and the blame game begins.

So if you are one of the few bears still standing, it’s not easy fighting the herd. I believe that trader Jesse Livermore was right when he said that to make big money you have to sit and wait. Although there are warning signals this bull market is coming to an end, you may have to wait a while longer. One major signal will be a huge snap in the S&P, that is, a drop of 100 to 150 points. Until then, trying to time the top is difficult in this environment.

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