The Energizer Bunny Market


Hi Dave,

There appear to be so many data points that suggest that the stock market is in trouble – valuations, rising consumer delinquencies…..the list goes on. Should we be shorting this market and/or at least take money off the table?

Gunther L. – Mendrisio Switzerland 

Hi Gunther,

Thank you for the question. I have a good friend from my grad school days at Oxford in Mendrisio. Great part of the world. 

The fact is that Netflix is overvalued, Tesla is overvalued, and Amazon is overvalued, the S&P’s by and large are overvalued. Etc, etc. But they have been overvalued for a long time. And, in the case of AMZN, its revenues continue to grow and its margins continue to stay razor thin…and people keep buying it and driving up the multiple they are willing to pay for it.


  1. Because we are in a market era of “nothing can go wrong” (until it does)
  2. The expected future earnings are still driving the stock.

Shorts will get paid. When? I’m not sure. We all know that the short side pays fast and in a big way.

Let’s look back at the last 2 major market corrections – August 2015. What happened? Saudi Arabia tried to drive US shale out of business. Did it work? No. But while they tried, US firms with exposure to oil were potentially exposed to large losses (reminiscent of the mortgage crisis in 2008). The market lost almost 20% due to the fear and uncertainty.

In 2011 there was general fear about the breakup of the European Union. Greek debt was the big theme. Scary? Yes. Did it get resolved? Yes, or not really, or who knows but everybody forgot about it. Fear and uncertainty drove the markets down significantly.

Of course, in 2008 the market crashed because the overexposure to bad mortgages did cause real and massive losses to the financial system. Major correction. Make no mistake, this was VERY obvious well in advance and there was ample time to extract oneself from the market before it got ugly. But you had to be very patient. Going to cash too early proved costly.

Will this happen again? Of course it will. When? You know that these things only show their face when they really start to happen. However, they usually give a warning. The charts show it. The price action shows it. That’s when we have to analyze it and ask if it is a real threat or a passing threat.

Interested in learning more about combining VALUATION and TECHNICALS?

The market hates uncertainty. Right now, there is a lot of “certainty”: earnings are rising all around the world; GDP is rising; central banks are still accommodative; tax reform is real and is increasing GDP; etc, etc.

Is there trouble brewing? Probably. Will it come to the fore at some point? Probably. In the meantime, what does an investor do? Run and hide?

Well, statistically, stock market returns over a 10-year period are low when companies are trading at the current high PE ratio. So, committing new money to an all-in market strategy is not supported by historical evidence.

Aspen’s strategy is different. It is a flexible strategy. We can be long the market when things are going up. When charts/fundamentals change, we can shift gears. We can hedge a portfolio, we can short, we can use options. We will know when the time comes and we will guide clients on how to do it.

When markets go down there are things that go up. We can calculate correlations and balance a portfolio from the downside, or reduce its exposure, or even tilt it to the short side.

My point is, fundamentals do drive markets in the long run. In the short run, this is not always true. Markets also go up more than they go down. However, investing long at the wrong time can cause years of pain.

In short, be flexible, be familiar with the current market environment, be aware of the risks, and have the courage to act when things change.

Register here for The Marriage of Technical & Fundamentals Webinar

Have a question for me? Just ask.

Leave a Comment