Five years ago, it looked like the world was falling apart. Remember when Lehman Brothers went bankrupt, freezing financing on Wall Street? The government had to bail out General Motors and the Federal Reserve pumped money into too-big-to-fail banks. Investors were running scared of the stock market.
Seems like years ago…but it was only 2008 and 2009 when this all happened. Fast-forward to today, and thanks to trillions of dollars of new money (printed out of thin air), the Dow Jones Industrial Average has ballooned back, close to 17,000.
The stock market became a bubble in 2007 when it surpassed 14,000, subsequently crashing down to 6,440 in March of 2009. Now the bubble is back; but bigger this time.
Bears like me, who believe the Fed created this new stock market bubble, are rare to find. More and more stock advisors and investors have turned bullish. They believe—incorrectly, I suggest—that all is well with the economy and that the stock market will head higher and higher.
To see just how many advisors have turned bullish on stocks, I really want you to look at the below chart of the Investors Intelligence Bull Index. Under the chart, you will see a black line, indicating the S&P 500.
Chart courtesy of StockCharts.com
The Investors Intelligence Bull Index tracks stock advisors’ opinions on the stock market. Currently, the index of stock advisors’ sentiment stands at 62.20, its highest level since (you guessed it) October of 2007. Whenever this index has gone over 60, the stock market has come down hard.
When it comes to investing, you don’t want to do what everyone else is doing, because history has shown that if you do, you’ll get hurt. Sure, in the short term, you can make money following the herd mentality; but, in the long run, it just gets too dangerous.
Mark Twain explained it best when he said, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
Dear reader; the odds of a very deep stock market sell-off are high. Investors have become too complacent; the past has been forgotten. The economy isn’t improving; we even had negative GDP growth in the first quarter of this year. The Fed has supported this entire stock market rebound with years of artificially low interest rates and a money printing program so aggressive that mankind has never seen anything like it before.
With all this said, understand that it’s very difficult, if not impossible, to predict the exact tipping point of the stock market. But what I can say with certainty is that when reality hits, and the portfolio losses start to accumulate, investors will run for the exits and push the market down hard. This is always the case with a market sell-off, and I doubt it will be different this time around.