Supply and demand for speculation, powerful trends, energy rollover

Traders can’t get enough of IPOs, SPACs, and other speculative vehicles these days. So while demand for these assets surges…

Corporate America and Wall Street bankers continue ramping up the supply of these “investments”. As a fee-driven industry, Wall Street will always sell as much as possible of whatever Main Street demands, regardless of the consequences.

Bloomberg’s data demonstrates that the value of U.S. IPO issuance in the past year exploded higher:

The previous 2 peaks were in 2000 and 2007, with a slightly lower peak in 2004. But more telling is the explosion in IPO’s issued by companies that generated losses (i.e. unprofitable companies). After all, everyone loves a good story about how XYZ company with $100 million in losses will be the next Google:

The above chart does not account for the fact that the total stock market’s capitalization has increased from 2000-present. Dividing the above figure by market cap, the value of unprofitable companies’ IPO issuance as a % of market cap is still more than 50% below its peak in 2000.

I wouldn’t consider this to be a very important warning sign for stocks. It’s more of a sign of the times we live in. Trading these high-flying stocks with momentum-driven strategies is very profitable, but as a basket these stocks aren’t suitable as buy-and-hold investments.

Powerful trends

Trend following, momentum, and breadth indicators often lead to the same result. Most powerful trends witness strong momentum and bullish breadth. That is what we’re seeing in markets right now.

Each of the past 53 days saw more than 70% of the S&P 500 stocks above their 50 day moving average. This is the 3rd longest streak of consistently strong breadth:

Historically, even slightly shorter streaks consistently led to more gains for stocks in the months and year ahead:

Energy rollover?

And lastly, the energy sector’s recent pullback triggered a MACD sell signal for 79% of energy stocks:

This wasn’t an effective short term bearish sign for energy stocks, and usually led to more gains 6 months later:

Conclusion

  1. Short term trend followers should continue to ride the bull trend because no one knows exactly when it will end.
  2. Medium term traders should go neither long nor short.
  3. Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.

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