I’ll let you in on my top secret investment strategy that has brought me blockbuster results over the past seven years.
Listen to Wharton Business School’s professor Jeremy Siegel.
The good doctor has been unremittingly bullish year in and year out, nearly pegging the stock index performance annually.
So, when he says that the Dow Average is going to rise to 24,0000 by the end of 2017, that’s good enough for me.
In fact Siegel thinks that at a current price earnings multiple of 19 times, the bull market has years to run.
It would not be until we hit nosebleed levels of 25X or 30X earnings that he would get worried. And the current ultra low level of interest might even make these high multiple numbers justifiable.
So, for the foreseeable future, we are going to see long periods of tedious range trading, followed by frenetic rounds of buying, once the market decides that it is time to discount the next rise in corporate earnings.
We happen to be in one of those range trading periods right now which could last all the way until September.
Actually, it is a little more complicated than that.
There was good reason for the stock market to go to sleep over the last two weeks.
Do you hear that great sucking sound? That is the noise of 170 million tax payers writing checks to the US Internal Revenue Service.
Foreign readers may not realize this, but tax payments are due in the United States on April 15th every year.
I would ask for your sympathy, but I know all of you pay far more in taxes than we do. I know, because I used to pay them myself when I lived abroad for 23 years.
Of the $6 trillion in revenues from all sources due to Uncle Sam in 2016, 37%, or $2.2 trillion will come in the form of individual income taxes.
That is a big hit for the financial system. That means for the last two weeks there wasn’t any extra money lying around to put into the stock market.
There is another reason why the stock indexes are stagnating here. The Q1, 2017 corporate earnings reporting season kicked off when Alcoa (AA) reported on April 8th.
Until then, we were in the quiet period, and companies were not allowed the buy back their own stock.
This is a big deal, since companies buying back their own shares have provided major support for the stock market for many years.
Possibly a quarter of all the net cash flow pouring into stocks since 2009 has come from this source.
Take it away, even for a short period, and the most bullish thing the market can do is move sideways, which is exactly what it has been doing for the past two months.
What happens when the tax payment deadline passes and the quiet period ends? Stocks take off like a bat out of hell. That will take us to the spring interim peak.
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ABOUT THE AUTHOR
The Diary of a Mad Hedge Fund Trader is written by John Thomas, one of the founding fathers of the modern hedge fund industry.
Seeing the incredible inefficiencies and severe mis-pricing offered by the popping of multiple bubbles during the Great Crash of 2008, and missing the adrenaline of the marketplace, he returned to active hedge fund management. With The Diary of a Mad Hedge Fund Trader, his goal is to broaden public understanding of the techniques and strategies employed by the most successful hedge funds so that they may more profitably manage their own money.
John graduated from the University of California at Los Angeles (UCLA) with a degree in biochemistry and a minor in mathematics in 1974. He moved to Tokyo, Japan to join a Japanese securities house as a research analyst, becoming fluent in Japanese. In 1976 he was appointed the Tokyo correspondent for The Economist magazine and the Financial Times. For the next seven years he published thousands of articles about the economies, companies, and leaders of Asia. He was one of the first American correspondents to cover China during the Cultural Revolution.