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Markets produced their strongest returns in four years in October – ignoring a steady stream of bad economic news and lousy corporate earnings.
The Dow Jones Industrial Average soared 8.5% while the S&P 500 jumped 8% for the month. The Nasdaq Composite Index was driven higher by strong big tech earnings. It skyrocketed by 9.38% and is now back above 5,000.
Last week's gains were muted with the Dow rising 0.1% or 16 points and the S&P 500 rising 0.2% or 4 points, so perhaps the jubilation is ebbing. The Nasdaq Composite Index gained 0.4% on the week.
Of course, some strategists are calling for the rally to continue and for the market to gain another 10-15% by year-end. All I can say is that if they want to send over what they are drinking, I will take a sip. But I will not reach my hand into my pocket and follow them into the market. The market is extremely overbought and investors should proceed very cautiously from here.
Credit markets also joined the party. The average yield and spread on the Barclays High Yield Bond Index rallied by 59 and 67 basis points, respectively, in October. That's an extremely strong performance. The average yields on energy bonds and basic industry bonds – the weakest industry sectors – even rallied slightly, though they still remain deeply distressed.
The spread on Barclay's Investment Grade Bond Index also rallied by 11 basis points back down to 150 basis points. The yield on the 10-year Treasury bond ended the month at 2.15%, after the Fed's October meeting predictably led to nothing. The Fed has continued to play Hamlet regarding a potential 25 basis point interest rate hike in December.
Fed Promises and Large Caps Are Driving the Delorean
October's gains were of the "Back to the Future" variety as investors piled into momentum trades – all based on tired central bank promises to keep printing money until the global financial system simply collapses under its own weight.
Of course, the former tenured economics professors didn't phrase their promises exactly that way, but that is the logical outcome of what they are doing. After countless bouts of QE, which have produced tens of trillions of debt and little growth, they decided to double down on failure. Their policies will prove to be one of the most profound intellectual and moral failings in history. It is going to drive the world over a cliff.
The first estimate of U.S. third quarter GDP growth came in at 1.5% this week, higher than I expected but still pathetic. The U.S. economy is running barely above recession levels, especially when you consider that the data is cooked.
The financial media and Wall Street continue to tout a (non-existent) self-sustaining economic recovery, while investors chase stocks higher on the hope and prayer that central bank policies, which have failed so far, will suddenly work now that we are at the end of the Debt Supercycle. Most investors are just trying to salvage a terrible year, but they are placing themselves in harm's way because the market is getting very frothy again.
If anybody had any remaining doubts about the credibility of the financial media, they were put to rest once and for all by the performance of CNBC's talking-heads at the Republican Presidential Debate last week. Not only did CNBC troika demonstrate their obvious bias, but they also exhibited an ignorance of the facts and of basic economics. This explains why CNBC is considered a laughing stock by serious people in the investment world.
Anyone who listens to CNBC, or anyone else in the mainstream financial media, for investment advice deserves to lose all of their money. Eventually people are going to realize that the mainstream media in this country has become a clear and present danger to our freedom and our pocketbooks.
The rally has been weighted to large-cap stocks – particularly large-cap tech stocks. Companies like Apple Inc. (Nasdaq: AAPL), Amazon.com Inc. (Nasdaq: AMZN), Alphabet Inc. (Nasdaq: GOOG, GOOGL), Facebook Inc. (Nasdaq: FB), and Microsoft Corp. (Nasdaq: MSFT) are among the few reporting strong earnings, and they have an outsized impact on cap-weighted indexes.
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.
Nasdaq crash by 40% with in three months super crash is coming
But my friend, as you continue to warn about the market, it has now soared an incredible 2,200 points since August when you insisted where we in danger of a continued sell off. Perhaps it is time to acknowledge that you were very wrong. Your Friend in Chicago
Do you have an average or even a slightly conservative price point to sell the VRX $50 puts that I've bought per the reccomendation, Michael?
While I agree with you, many variables, as you and most are aware of may affect the share price, so I call on your expertise to ask if a 100% gain(selling the put at double, or other) should be sufficient or if we are realistically looking at a near term collapse or even a moments drop in share to capitalize. I just don't want this one to be a loss. Thank you for your time, G
What the strike price of VRX were you recommending for March 2016 puts at a cost of $4.50/contract?
Be the first to warn the gamblers bidding up Amazon to a PE of 900. Where do they expect all the earnings to come from in a mail order business, Sears and Montgomery Ward started that about 100 years ago. One is dead and the other is dying. Granted they have a cloud business that is growing and their 'Prime' club offering, there is all kinds of competition for the streaming business which is at the mercy of lackluster movie offerings from Hollywood. Bezos movie productions is next. Borrowed 6 Billion in 2015, 1? Billion in 2016, Book value of $25.
With regard to VRX, you say "I've recommended that investors buy March 2016 puts at up to $4.50 per share because I expect the stock to move much lower."
Any particular strike price come to mind?
Hi Eric & Brian,
You can find the details of Michael's recommended play on VRX right here: http://suremoneyinvestor.com/2015/10/heres-how-to-make-my-favorite-trade-on-vrx/
And keep an eye out for more details to follow at Sure Money. Thanks for being Members of Money Morning.