Irrational Markets and Foolish investors; perfect recipe for disaster

Irrational Markets and Foolish investors

Markets can remain overbought or irrational for much longer than most bears can remain solvent

This is a very irrational market. The Fed is supporting it and openly encouraging the corporate world to commit fraud by borrowing large sums of money (on the cheap). These funds are then used to buy back shares to manipulate EPS. It, however, also can push stock prices higher.  Many experts state that this market can’t trade higher much longer, but they have been saying that for over two years and counting. Take a look at the chart below, and while we do not wish this outcome for the Dow, it cannot be ruled out.


This is a weekly chart of the stock NVDA

Look at how long it has traded in the extremely overbought ranges and the stock has continued to soar higher and higher. If one applied traditional Technical analysis to this stock, one would have been inclined to short this stock long ago and would have wound up broke in the process.  We are not stating that the Dow will follow this path, but there is nothing to stop it from taking a similar path. Remember the main force behind this market is “hot money”.  NVDA has traded in the overbought ranges on the slow-moving charts since Dec of 2013.


Until the supply of easy money is cut off the markets will trend higher for corporations will continue to borrow money and use this money to buy back shares.  Share buybacks artificially boost EPS and corporate officers are able to walk away with huge bonuses for doing next to nothing. Rates would have to approach the 4% mark before the supply of hot money starts to ease off. Until this occurs every strong pullback should be viewed through a bullish lens

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