Irrational Exuberance

The stock market is basically flat so far for this year … after an almost 30% increase in 2013 … see: CNN Story. Most everyone, including myself, had expected that 2014 would therefore be a modest downer. However, as we have seen many times in the past, stock markets like to crater … but usually not from a position of rational exuberance … but rather from one of  irrational exuberance. And we have not begun to approach such crazy levels in the current bull market ... see: Scaremongers.

So now I am hedging my pessimistic stock market forecast for this year.  I now think it may start discounting a Republican election sweep this coming November … with them gaining seats in the House and possibly even running the table in the Senate … at which point President Obama may be forced into a policy corner from which he cannot escape.  This could well result in a rebounding economy, a large movement toward energy independence, the beginning of a reining in of our entitlement programs, a reduction in bureaucratic regulations, and maybe even the making of an eunuch out of Obamacare.

Such an enormous economic and psychological rebound might well propel the stock market into this state of irrational exuberance … a move in which very large profits can be reaped … however with an even greater dollop of risk.  For, most certainly, this would be followed by an unnerving stock market correction … maybe sometime in early 2015 or even sooner.  So beware and be wary … take you profits long before this market peaks. When asked how he made so much money on Wall Street, Bernard Baruch said, “I always sold too soon.” May I suggest the same strategy for you, dear reader.

How do you tell when the market has gotten too frothy?  May I suggest when the clerk at the neighborhood 7-11 starts giving you stock tips … or when Tesla Motors hits $500 per share … or, on the downside, when Iran announces that it has acquired a nuclear weapon.

Then sell out everything and head for Bora Bora … for the big bad bear should once again be on the prowl.

Afterward: There is an interesting wrinkle to this scenario ... what happens if the stock market is behaving so well going into this fall that the electorate see this as the Democrats' doing and vote for them in droves?  If this occurs, I think that the stock market might tank very soon thereafter.