I continue to be amazed at the confidence of the bulls. I have seen enough market cycles to understand that sentiment will be most bullish at the top, but I still find the cockiness of those of bullish persuasion fascinating.

As this bull market ages, instead of getting more concerned about the potential for a correction, the bulls use it as proof that the risks are smaller than the bears would have you believe.

http://themacrotourist.com/images/Azure/MacroTouristSep0814.png</p>

In the last four years since the depths of the 2008/9 credit crisis, we have rallied over 200% in the S&P 500.

http://themacrotourist.com/images/Azure/SPXSep0814.png

According to the great research shop Bespoke Investment Group this bull market is now the fourth oldest bull market on record:

http://themacrotourist.com/images/Azure/BespokeSep0814.png

Although there is nothing saying that we aren’t going to rally for another couple of years like we did in 1949, 1974 and 1987, I just don’t get how you can get more bullish as this bull market extends itself in both price and time.

I would suggest that although you should avoid the perma-bears that are constantly calling for the end of the world, the fact that we have been rallying for so long should neither give you comfort to follow the recently hot handed perma-bulls.

http://themacrotourist.com/images/Azure/ferrisSep0814.png

Contrary to the natural human tendency to be more confident of something when everyone else is doing it, the fact that stock prices have risen so much actually increases your risk. Buying the S&P 500 today at 2,000 when the crowd is all too quick to confirm the wisdom of your purchase, is much more risky than buying it four years ago at under 700, when that same crowd was convinced the financial system was collapsing into the abyss.

There is no doubt that I have been early and wrong in my bearishness. But I refuse to find solace in the fact that stocks seem impervious to bad news. We all know the famous Wall Street axiom that stocks love to climb a wall of worry. However, there is no “wall of worry.” Those of bearish persuasion have largely become extinct.

http://themacrotourist.com/images/Azure/SentSep0414.png

This is no “wall of worry” but instead of an ocean of complacency. As we drift along and the good weather emboldens the masses, you should not take comfort in the absence of storm clouds. And as we get farther and farther away from the shores of fundamental value, you should be more and more concerned.

When you see the bulls openly mocking the bears, you need to remember that the Market Gods always punish those that are most “sure” of their position.

I understand all the bullish arguments. I realize that it is difficult to sit out the dance while everyone is partying, but it is getting late and the party is getting increasingly out of control. Maybe I will miss the best part when things are the most fun, but there is little doubt in my mind that those swinging from the chandelier are ignoring some very real risks.


The end of QE3

I don’t have the answer for the question of what will derail this bull market. But I do worry about the end of the QE program.

For those that don’t think that the Fed’s QE programs have had a direct effect on the stock market, I simply present this chart.

http://themacrotourist.com/images/Azure/SPXvsFedSep0814.png

I am convinced that the Fed has had a huge effect on risky asset prices. This relationship is not by chance. I have sat on this desk and watched QE programs affect risky assets on the very day that the Fed executes them in the open market.

I have also watched the end of both QE1 and QE2 cause an almost immediate sag in risky assets. Here is a chart of the trading in the S&P 500 during the end of QE1.

http://themacrotourist.com/images/Azure/QE1Sep0814.png

And here is the end of QE2.

http://themacrotourist.com/images/Azure/QE2Sep0814.png

The Fed ended both of those programs cold turkey so a direct comparison to the end of QE3, which is being slowly weaned lower, is probably not fair. But if you believe, as I do, that the Fed’s QE programs have put an unnatural bid to the stock market, you have to be concerned about the ending of QE3.

Now you might argue that the ECB is going to take over the quantitative easing baton from the Fed. I would accept that argument, but I still think that at the margin the end of QE3 is not going to be bullish for US stocks. Easing in Europe will help US stocks more so than the absent of easing, but don’t forget that this will translate into a lower Euro and a stronger US dollar. This will weigh heavily on US multinationals.

Also if US stocks were not priced for perfection, then I would be much less concerned about the end of QE3. But I don’t think it will take much for stocks to pause and reassess their lofty levels. It will take continued buying to hold stock up at these levels. With the Fed stopping their balance sheet expansion, I expect that buying to pause.

Given their massively overbought nature, once stocks stop rising, some weak longs are going to be shaken out.

At the very least it makes sense to take a deep breath and question whether you want to chase the market higher. Remember the fact that perma-bulls are so confident is not reason enough to go long…


Positions

http://themacrotourist.com/images/Azure/PositionsSep0814.png</p>