Are We At The Euphoria Stage?

Despite the potential for volatility on Thursday, the stock market hovered near its all-time high. The VIX once again stayed at the 10 handle. The chart below takes the excitement seen in the low VIX, high forward PE multiples, and bullish sentiment and combines them to create the Euphoriameter. It’s currently at the fourth highest point since 1988. The peak in the late 1990s and 2014 coincided with corrections in the stock market, but the peak in 2005 was a false flag. The crash caused by the financial crisis was more about speculation in real estate than speculation in the stock market. This is why the euphoria in 2007 wasn’t that high.

As you can see from chart below, the AAII survey and the ICI Funds implied asset allocations show that cash levels are historically low. With the innovation of Robinhood providing free stock trading and apps like Acorn which help you invest your spare change into the stock market, every last penny everyday Americans have is going towards the stock market. You can see the money pouring in by looking at the ETF purchases. I’m not denying the innovation of these new apps, but the premise that it’s always a good time to buy stocks is flawed. It’s especially not a good time to buy when everyone is getting in. The AAII survey has only shown more cash twice in the late 1990s and in 2014, while the ICI Funds indicator is showing record low cash levels.

Looking at the lack of volatility in a different way, the chart below shows the duration of trading ranges which are 3.2% from the top of the range to the bottom. Since 1928, there have been 2 periods where this range has lasted 70-79 days and current streak is one of them. There’s only one streak which was 80-89 days. I wish we had stats on the VIX which went back to the 1920s because the current market is just like the late 1920s and the late 1990s in term of excitement. Investing isn’t supposed to be like going to a theme park. Often the most boring stocks provide great returns. Tesla’s cult-like following is a great example of this. The investors of Tesla are buying it for fun. The annual meeting was like a show. Usually when management attempts to allure you with a show, they’re trying to distract you from something. In Tesla’s case, the investors in the cult stock are being distracted from the losses. At some point, the stock will fall to its intrinsic value which will be painful for all investors.

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