As We Reach New All-Time Highs, We Don't Even Know What We're Bullish About

Summary

• Futures advance overnight to all-time highs.
• As usual, futures are up on two fallacies: the tax bill being delayed and the assumption of a planned non-cut of interest rates.
• The euphoric music will continue to play, until one day we wake up and it doesn't.

By Parke Shall

Very early on Wednesday morning it became clear that the market was once again going to be opening, more than likely, at new all-time highs. Stock futures advanced in the overnight session and as of the timing of this article, are indicating that the major indices will be opening at all time highs. By the time this article is published, it is likely that the market has already opened Wednesday and that headlines across financial media are all likely focused and centered around the markets being at new highs.

The exact numbers for today are mostly irrelevant. What we wanted to cover in this article today is why stock futures soared overnight and why we believe the market is showing signs of extraordinary euphoria that are far more likely to be a harbinger of irrationality and negative things to come than they are a sign of true economic prosperity and legitimate reasons to be bullish.

In order to make our case clear, let’s take a look at the two main headlines that drove futures overnight.

1. The first was that the Federal Reserve is not expected to hike rates later on today

2. The second was that details of this administration’s tax reform will be released a day later than expected, on Thursday.

Reuters reported on the latest with the Fed,

The Federal Reserve is expected to keep interest rates unchanged on Wednesday as speculation swirls on who will be its next leader, but the U.S. central bank will likely point to a firming economy as it edges closer to a possible rate rise next month.

The Fed has raised rates twice since January and currently forecasts one more hike by the end of the year as part of a tightening cycle that began in late 2015.

Investors have all but ruled out a move at the end of this week’s two-day policy meeting. The Fed is due to issue its latest policy statement at 2 p.m. EDT (1800 GMT).

In addition, Politico reported on the tax bill,

House Republicans postponed the much-anticipated rollout of their tax reform proposal Tuesday night, an ominous sign for a direly needed legislative accomplishment for President Donald Trump and his party.

House Ways and Means Committee members spent all day Tuesday holed up in conference rooms trying to iron out last-minute disagreements. Senior committee staff worked through the night Monday and were expected to do the same on Tuesday to unveil the bill at a GOP Conference meeting at 9 a.m. Wednesday.

But in a move that foreshadows the difficulties awaiting the party of Reagan, GOP leaders and tax writers postponed their big reveal to buy themselves more time. They now hope to release the bill Thursday but privately acknowledge they have a number of disagreements to resolve first.

Therein lies the lunacy and ridiculousness of today’s market. First off, rates were never expected to go up this month. We have already had two rate hikes this year and a third and final rate hike has been predicted for December, not November, so the notion of rallying off of the fact that we are not getting rate hikes in a month where we were not expected to get rate hikes is comical.

As we have stated in a previous article, it just seems to us that market participants, whoever they are, are finding another reason to be bullish when there may not actually be one. By now, this is something that market participants should be used to. The market has been using nonsense news while ignoring negatives as an excuse to make bullish moves for the better part of the last few years now. One by one, alarming headlines come in and one by one the market moves higher. This was the case with the Chinese stock market crashing, this was the case with Brexit, this was the case with the presidential election and this will continue to be the case going forward until there is a major sentiment shift.

Further, confirmation of rate hikes happening in December should move to alarm a market where corporations and consumers are sitting on and servicing record levels of debt. Every 25 basis point tick higher just speeds up the process of tightening the screws on debt holders whose interest expense is going to tick higher. Now, at a point where we are at record levels of outstanding debt, is arguably the worst possible time for this to happen. However, nobody is discussing this and this is not the state of mind that the market is in. Right now, the market is looking for good in everything and ignoring the bad.

There is no better example of this then the delay in releasing the new tax bill. To demonstrate a move even further into lunacy, the futures market actually rallied on news that the GOP was waiting an extra day to release the details of its forthcoming tax bill. Where everybody of sound and sober mind saw that this was likely due to conflict regarding the bill's contents, the market chose to see this as a positive: that the tax bill, likely being fought over and priced in to the market five times over at this point already, is facing delays due to the nature of its contents likely being in controversy between members of a party and Presidential administration that has not been able to get any significant legislation passed over the last year.

Bullish?

Only in the "stock market upside down" would it make sense for futures to rally on this news.

In fact, we made the foolish mistake of presuming that futures were going to move lower into the overnight session on this news. But regardless, the market found the small silver lining in this news and chose to celebrate the fact that the bill was being released, and ignore the fact that it is obviously being done so under duress.

This overnight action in the futures market and presumed opening action in Wednesday's session only once again goes on to reaffirm our long standing belief that the stock market is operating purely on euphoria and that both price discovery and anything other than long bias sentiment left us years ago. While long only investors and those with 401K's may continue to choose to see this as great news while ignoring valuations and the euphoric nature of sentiment, we are certain of only one thing and that is that this will come to an unceremonious end at some point. We can’t predict the timing and we can’t predict what the catalyst will finally be but, as we learned from the Chinese stock market a couple years ago, valuations can only go so high and the government can only intervene so much until you set yourself up for an unexpected and unwelcome recession or pull back.

From that point forward, government intervention may only be able to do so much before the United States winds up like Japan or the dollar starts to lose the confidence of the rest of the world. With every notch higher in euphoric sentiment, we believe it is important to buckle down and be far more judicious about investing in risk adverse strategies. While the signs of euphoria may encourage others to get into the market and invest, all they do for us is raise the red flag a bit higher every time. The S&P average PE is now pushing 20 and the Schiller PE is now over 31. Debt is everywhere. Our entire "boom" that we have experienced over the last 9 or 10 years has been a direct result of irresponsible monetary policy, in our opinion. The music will continue to play until one day we wake up and it stops. We continue to believe that strategically reducing long exposure while increasing exposure in things like precious metals, foreign currencies, commodities and emerging markets is a strategy worth continuing to employ in inverse scale to the higher the market goes from its currently stretched valuations.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.