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The S&P 500 Is Looking Parabolic

The S&P 500's increasingly parabolic shape has many wondering if the rally can continue. Valuations are high when we look at Robert Shiller's Cyclically Adjusted Price-to-Earnings Ratio (NYSEARCA:CAPE), the Q-Ratio (the replacement cost of the S&P 500), and the regression trend of the market going back to the early part of the 20th Century. However, as the old saying goes, "markets can remain irrational longer than you can remain solvent." Just because valuations may be stretched, the underlying fundamentals of the economy may not compare to previous rallies of this magnitude (another article for tomorrow), and technical indicators are signaling overbought conditions does not mean the market will do a 180 tomorrow and plummet like a rock. Actually, these overbought and overbullish symptoms have been in place for most of the post-financial crisis rally. The permabears like Roubini and Schiff have been proven wrong day in and day out.

What is the point of this post? In any market environment there the common excuses can be heard, "this can't be happening because the fundamental don't support it", "as soon as I jump in the market will reverse", "I'm just waiting for a pullback to purchase at lower prices." Listening to people's opinions is a mistake. The real profits are made with systematic, quantitative systems that eliminate human emotion and make decisions based upon known facts. These models can be based on fundamental factors, technical data, sector rotation strategies, business cycle theory, or any combination of them all. Basing your trading or investment strategy on a well designed system will keep you off the sideline and in the game during rallies like we've seen since the 2011 lows [Figure 1].

Figure 1

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.