It does not matter what you call it or how you explain it. The Trump trade. A tax reform rally. Heck, you can attribute the longest uptrend in history without a 3% pullback to global quantitative easing (QE). It makes very little difference. Stocks have been stupendous.
Does a record number of trading days without a 3% correction mean anything? Not in isolation. The second-longest streak occurred between January 1995 and January 1996. And yet, back then, the phenomenal ’90s stock bull was only in the fifth inning of a record-breaking stretch (10/1990-3/2000).
On the other hand, the dearth of selling activity today is occurring at a moment when investors are more leveraged than ever before. They have never been more confident in future stock performance. The average cash allocation is the lowest on record, even lower than it was at the peak of dot-com euphoria (1/2000). Meanwhile, previous periods of relative equanimity – trading session with less than a 5% correction – preceded major financial crises and severe stock bears.
There’s more. A number of investors have been piling on the ‘no-vol’ train by shorting the CBOE S&P 500 Volatility Index (VIX). Shorting VIX futures has been so profitable for so long, they’ve become like pigs eating at the trough. And now, the positioning appears to represent a few too many people standing on one side of a crowded boat.
As if these issues were not enough, some market anomalies simply defy sensibility. For example, would you acquire a corporate bond of a junk-rated European corporation if it yields LESS THAN a comparable U.S. Treasury bond yield? Probably not. Nevertheless, world central bank distortions have created this exact scenario.
Some of these concerns might be ameliorated by ultra-low borrowing costs, but not all of them. For one thing, the popular 10-year yield has pushed to the upper limit of an intermediate-term range.
