Has The Stock Market Reached Peak Optimism?

By Tuesday, October 22, 2013

Stock Market Reached Peak OptimismOptimism towards key stock indices is increasing each day. The U.S. stock market “seems” to be a safe place, and it’s common to hear stock advisors suggesting we are going higher on key stock indices.

Key stock indices like the S&P 500 are making fresh highs. Google Inc. (NASDAQ/GOOG) has surged above the $1,000-per-share mark. Just take a look at the chart below.

Recently, we heard the “Godfather of Charts,” Ralph Acampora, turn bullish on the key stock indices as well. Not too long ago, he held a very bearish view on them. In August, his stance was that key stock indices like the Dow Jones Industrial Average would decline 20% to 12,000. (Source: Wall Street Journal, October 17, 2013.)

Hold on a second! This all looks too familiar!

Google Inc Chart

Chart courtesy of www.StockCharts.com

Whatever happened to what Sir John Templeton said about the bull run stock markets? If I remember correctly, it went something like this: “They are born when investors are most pessimistic, rise when they are skeptical, mature once optimism builds up, and come crashing down once there’s euphoria.”

It’s almost as if investors have forgotten everything that we saw with the stock market in 2007 and 2008—how it went crashing down after optimism surged.

And remember 1999? Investors were so bullish on the key stock indices that they were investing in companies that did not have any revenues or weren’t going to make money in the long run. After that euphoria, we saw it all come crashing down. Investors forgot one basic principle: when stocks keep reaching new highs; fundamentals really matter when it comes to the stock market.

Have we reached peak optimism on the key stock indices on the current rally?

One of the major factors behind the bear market rally we have seen since 2009 was easy money. It’s still around. I can potentially see key stock indices going a little higher, as the punch bowl is still on the table and I hear the new Fed chairman wants to keep the easy money polices in place as well.

In the short term, key stock indices are showing robust price rises, and that’s what the bear dressed as a bull does best. Unfortunately, take away easy money, and there is not much for stocks to celebrate. That’s why I don’t buy into this stock market rally.

About the Author, Browse Michael Lombardi's Articles

Michael Lombardi founded investor research firm Lombardi Publishing Corporation in 1986. Michael is also the founder and editor-in-chief of the popular daily e-letter, Profit Confidential, where readers get the benefit of Michael’s years of experience with the stock market, real estate, economic forecasting, precious metals, and various businesses. Michael believes in successful stock picking as an important wealth accumulation tool. Michael has authored more than thousands of articles on investment and money management and is the author of several successful... Read Full Bio »