ARTICLES

The Bigger Fool

29 January 2018 By PDSNET

On 18^th December last year we wrote an article about the acceleration of the S&P500 index called “The 3^rd Acceleration”. In that article, we drew attention to the remarkable acceleration of the S&P500 index since the beginning of 2017 and especially since September 2017. We identified three trendlines, each one steeper than the previous one. Since the start of 2018, however, there is a new, even steeper trendline which should probably be called the “4^th Acceleration”. Consider the chart:

S&P500 Index November 2016 to January 2018 - Chart by ShareFriend Pro

This is a remarkable development and shows that we are in an entirely new kind of market. Traditionally, markets which are rising pause periodically for a “healthy” correction where prices come down to more sane levels and investors get a chance to catch up mentally with higher levels. This market is not doing that. It is going up faster and faster. The 4^th acceleration since the beginning of this year is truly breath-taking. The S&P went up 100 points in the first ten days of the year – from 2700 to 2800 and now, just seven trading days later, it is already at 2872. This can only happen because a new type of investor is getting into the market – Joe Citizen. In other words, the rise in the market has become news, everyone is talking about it and everyone wants to be part of the action. That is the stuff that asset bubbles (like the bitcoin bubble that we commented on a month ago) are made of. The market is now going up, not because it represents value in terms of the companies which the shares represent, but simply because new investors, who know very little about shares, hope to make a quick buck in a few short weeks or months. We call this the “Bigger Fool” phenomenon. People buy shares, not because they have studied the underlying companies and found them to be good value – but because they will be able to sell them to a bigger fool in a few weeks or months from now and make a tidy profit. This has been a definite stage of any run-away bull market throughout history. A gap appears between the prices of the shares and the profits of the companies that they represent. In our opinion, we have only just entered this stage and share prices will probably go considerably higher on the back of growing bullishness. The euphoria will also spill over into other world markets, including the JSE. But we also believe that the S&P500 simply cannot continue rising at the rate of 100 points every ten trading days – so either there will be a sideways market or a correction - or the bubble will burst. The former seems more likely at this stage. You should position yourself to take advantage of the optimism, but make sure that you are protected against any sudden loss of momentum.  

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