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Profit By Avoiding The Froth-Mongers


Dissect the "total market bubble" theory.

Examine the real reason for equity price inflation.

Explore a better perspective for investing and trading today.

If we are to believe what just about everyone is saying about the current stock market situation, we're in a historically huge equity bubble and an imminent pop is due any day. That seemingly astute level of reasoning is acting as the driving force behind many trading decisions so it's no wonder that the market has lost its footing. Let's all take a step back and examine the situation a bit more carefully to determine if we're inside of a bubble that is ready to blow.

The first point we need to address is the idea of the entire market being in a bubble - the claim is rather ridiculous. If the "total market bubble" theory were actually true, it would mean that just about all equities and most commodities are being bought and sold far above their "fair market value" on irrational over-valuations, and this simply is not the case. The driving force behind the rise in equity prices is best described as a comedy of terrible ideas made into policy.

Keynesian economic policies are always a bad thing because they create a condition of negative reinforcement, where a previously instituted bad idea requires a new bad idea to be inserted in an effort to prop up the failure of the preceding idea. Initially, the illusion of greater value manifests yet no real value is ever created.

QE (quantitative easing) combined with the extended period of low interest has not had any effect on the fundamental values of commodities or equities. The general rise in prices, especially as reflected in the broad indices such as the S&P 500 (SPX) is due to a reduction of viable investment opportunity and not an increase in value, actual or perceived. In fact, the true values of most securities have remained largely flat since the events of 2008 and 2009 despite increased prices.

Does it sound like I'm splitting hairs and that regardless of why the prices are as high as they are, it MUST be some kind of effervescent force influencing the markets? Trust me, it's not, and that is a lazy assessment for anyone to put forth. Yes, the market is inflated but it's not because of hype and euphoria, which are hallmarks of a market bubble. The root of the problem is almost exclusively policy.

The effects of QE combined with legislation such as Dodd-Frank have resulted in economic stagnation on a grand scale - not a bubble. What this means is that there will be no pop, rather, we will see the market attempting to continue rising incrementally only to fall back several points for each point it manages to gain, like a fat man trying to stand up after sitting a bit too comfortably in a cushy couch. The laws of gravity are unrelenting in both instances.

This is bad news for investors, but fortunately for traders this presents a level of predictability and a sense of security that would only be slightly misguided. The unintentional best-kept secret is that US economy is great, but you wouldn't know it by looking at traditional metrics. The reason we cannot glean relevant information from commonly used statistics such as year-over-year revenue, earnings reports or even the security prices themselves over time is due to the fact that our economy is shackled by terrible government policy.

Forget about slamming a company for failing to meet quarterly earnings expectations - in THIS economy, hamstrung by failed DC leadership, it is a success if a company produces a profit at all. Never mind that a company may have fallen short compared to the previous year or even the previous quarter. Looking at manufacturing data or CPI? It doesn't mean much because the economic stagnation that is weighing on the market manifests itself as general uncertainty to average citizens. They want to buy stuff but they're not going to until a sense of stability returns.

Don't let hyperbole and over-sensationalized bubble doom headlines scare you away from a very lucrative opportunity. The key thing to remember is that if you are going to get involved with investing right now, it's going to pay you to understand that traditional thinking will generally result in a loss. Saving and long-term investing are currently foolish plays. Short-term strategies rule the day, and we'll be discussing some of my favorite strategies in upcoming articles.

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.