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As a long-term investor, I'm a raging bull. I expect the markets to double in the next five years.
However, as a trader, I'm cautious up here and I'm skeptical of the new record highs stocks just made.
There are a dozen reasons that point to markets continuing to climb for several more years. But markets don't go up in a straight line, though they can have long upswings lasting years.
We just made new all-time highs again in this post-Irma "relief rally," so it's the perfect time to check to see whether there are any serious impediments to going a lot higher in the short haul.
Here's the base case for stocks doubling in the long term and how to survive the short-term pitfalls in front of us…
The Big Dow Double Down
The bull market case isn't just academic, it's positively fundamental.
Since 1998, the number of listed companies on U.S. exchanges has been cut in half. Since just 2007, the surviving listed companies have bought back more than 7 trillion dollars' worth of their own shares, further reducing total shares outstanding.
Because of share buybacks, mergers, acquisitions, leveraged buyouts, industry consolidation, ever larger economies of scale, companies not splitting their shares, the passive investing trend where stocks aren't traded but warehoused, and the complete dearth of IPOs, there will be fewer and fewer shares in the open market for investors to buy.
At the same time, there's more and more capital being created every day.
Besides the tens of trillions of dollars printed globally by central banks over the past 10 years, the market being up more than 260% since 2009 is a source of reinvestment capital scooping up more shares. New money in the form of net profits, globally, is being parked in stocks.
More capital chasing fewer shares is an easy equation to understand. Being bullish is a no-brainer.
Unfortunately, it's not that simple.
I'm a cautious bull up here. There are a few potential pitfalls we need to leapfrog, and we need to know how.
How to Handle the Hurdles
If we can't swerve past these roadblocks, I want to have stops down on all my positions and step aside if any significant profit taking turns into a more serious rout.
Stocks are expensive by almost every historical measure analysts look at. Valuation alone isn't what moves stocks, but it is important when the crowd is nervous about "overvalued" stocks.
Earnings have been positive over the past few quarters, with the second quarter seeing more than 10% growth in earnings for the S&P 500. But a lot of that robust earnings growth in the first and second quarters of this year was enhanced by a 10% drop in the U.S. dollar. If the dollar firms up, that earnings helping hand will flatline.
If interest rates tick up, the dollar will firm, and that might end the earnings run.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.