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Why The Market May Go Higher: Simple Bubble Reason Revealed

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April 25, 2013 – Comments (5) | RELATED TICKERS: SPY , IBM , MMM

The markets are trading near their all time highs and very likely will continue higher. Today, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is trading at $158.85, +0.95 (0.60%). The all time high reached a few weeks ago was $159.71. While the markets will go higher, it is important to recognize a growing bubble in equities. 

Right now, the S&P 500 P/E sits at around 15. This is high historically but not outlandish. While earnings this quarter have generally beat expectations, almost all big companies like International Business Machines Corp. (NYSE:IBM) and 3M Co (NYSE:MMM) have missed on revenue. This tells us that growth is slowing but cost cutting is helping earnings per share beat expectations.

So with growth slowing, how can the market keep going higher? The Federal Reserve has manipulated the yield curve so that there is nowhere else to go for any return on your money. With interest rates stuck at obscene low levels, investors feel they have no other choice than to put money into the stock market.

Is this a good reason to invest? Absolutely not. This is how bubbles are created and this is no different. If the markets break higher we could see another thousand points or more added to the Dow Jones Industrial Average before an epic collapse is signaled. Bubbles in history last a while, getting every average person into the market before the collapse. However, the risk of collapse is lurking each day should the right catalyst hit.

Gareth Soloway
InTheMoneyStocks.com

 

5 Comments – Post Your Own

#1) On April 25, 2013 at 1:53 PM, GirlScoutDad (96.73) wrote:

This reasoning makes sense to me.  However, I suspect that if the market does go 1,000 points higher, my Reason will probably be overtaken by my Greed and I probably won't end up selling, then I'll get caught like everyone else when the bubble bursts. 

Maybe I can set a sell target now - say, Dow at 15,555.55 and sell 20 to 25% of my holdings at that level.  If I put a number in writing now, then maybe I'll have a discipline I can stick to later, however arbitrary that might sound to anyone reading this post!

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#2) On April 25, 2013 at 4:01 PM, awallejr (83.95) wrote:

Except the market would need to DOUBLE from here to equal stock valuations at the last bubble crash.  So no we aren't even close to a bubble in stocks yet.  And no the average person isn't getting back in the market either.  They left and are not going to return.  Also demographics in general keeps them away since the older one gets the shift goes away from equities into bonds.

You have neither a technical argument nor a fundamental one to support your "epic crash" call.

Now corrections can always happen, and are healthy for the market long term. But what I have been seeing is sector corrections instead which actually bodes well for the overall market.

Stop scaring people needlessly.  Unless of course you have an agenda to do so.  

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#3) On April 25, 2013 at 4:46 PM, jiltin (27.17) wrote:

During 2007, I could exactly say on the date, when DOW was in 14130+, to all my friends come out of stocks. They were laughing at me as I was not even putting single cent on stocks !

When I able to tell with my basic knowledge exactly pin point, you must be able to clearly identify in future.

I do agree with stop scaing people. When you have doubt about this "markets break higher", you can not say bubble. 

Scaring needlessly weakens position and your review...No one will believe when the real bubble happens...

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#4) On April 25, 2013 at 5:02 PM, JohnCLeven (79.55) wrote:

Why The Market May Go Higher: Because companies may keep growing earnings over time.

It's really not that crazy.

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#5) On April 26, 2013 at 7:26 AM, FelixCaliferous (56.27) wrote:

Bond yields are comaparble to those of S&P but are held down artificially by Ben & Co.  If you are afraid, then there is no place for you to hide.  Instead, recognize the healthy gains to be made in common stocks today. There is no excess valuation in the market right now. Fool on, but please do so for a good reason.

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