Investors Ignore Signs of Froth, Bid Stocks to New Highs

Warning signs? What warning signs? The bulls on Tuesday showed that they won’t be deterred. High valuations be damned. Even North Korea’s firing of an ICBM that splashed into the Sea of Japan couldn’t dampen investor giddiness.

Major market indices closed sharply higher on Tuesday. Investors were encouraged by robust retail numbers, solid third-quarter earnings, and continued economic growth.

Holiday shopping is breaking records, a tailwind for stocks. Traders also were cheered by the Senate confirmation hearing Tuesday of Jerome Powell to become Federal Reserve chair.

Powell is a safe replacement for Janet Yellen. He told Senators that he would continue Yellen’s policy of gradual tightening. He’s neither a hawk nor a dove on interest rates. Wall Street likes him because he won’t rock the boat.

Technology stocks were among the big gainers on Tuesday. The tech sector year to date has greatly outpaced the S&P 500. Seven of the world’s 10 most valuable companies are in the tech sector. As the stock market keeps marching to new highs, the gains are concentrated in a handful of the biggest tech stocks.

Chomping at the bit…

Investors are euphoric. Records keep getting smashed. The Nasdaq is on a tear.

The yakkers on CNBC are stirring excitement about “Nasdaq 7,000.” They say Apple (NSDQ: AAPL) will soon become a trillion-dollar company. Tech IPOs are generating breathless hype.

These are red flags of a market top. Are we looking at a repeat of 1999? Consider the following news item:

Data Trek Research reported Monday that the search phrase “buy Bitcoin with credit card” is increasingly popular on Google. Data Trek said the phrase has reached its historic peak.

Yikes! You’ve heard of the smart money? Welcome to the dumb money.

The value of Bitcoin has been soaring. The crypto-currency closed Tuesday at $9,955 per one Bitcoin. Bitcoin boosters are crowing that it will soon reach $10,000 per unit. Less than two months ago, Bitcoin was at $5,000. Year to date, Bitcoin has jumped 1,000% in value.

Bitcoin investors see the crypto-currency as “digital gold.” During a financial crisis, the theory goes, Bitcoin would provide a safe haven.

But crypto-currencies are risky. They exist by government permission. China has banned all new coin offerings. More governments including our own could outlaw them. They’re vulnerable to hacking.

Jamie Dimon, CEO of JPMorgan Chase (NYSE: JPM), recently called Bitcoin a “fraud.” Dimon went on to say: “If you’re stupid enough to buy it, you’ll pay the price for it one day.”

The Bitcoin craze represents a bubble in search of a pin. The appetite to buy Bitcoins with leverage confirms it.

Credit cards impose some of the highest interest rates of any consumer lending product. The average national rate right now is 16%. If you’re running up a balance funding your investment, you’ll need 16% in profits simply to break even.

Human beings are inclined to blindly follow fads. They’ll follow them right off a cliff. Instead, you should follow contrary investing.

Contrary investing bucks the herd. Most people (and that includes investors) are lemmings. They’re followers, not independent thinkers. They move in groups. They buy after prices have already risen; they sell after prices have already fallen.

Bitcoin gets hyped a lot by the financial media. But the Bitcoin frenzy will probably end in tears. Dutch Tulip mania comes to mind. So does Charles Ponzi.

Learn to spot extreme crowd behavior. Tuesday’s rally is further evidence that you should make defensive moves. But you needn’t run for the exits. Book profits from your big gainers. Don’t load up on pricey Wall Street darlings. Avoid exotic investments like Bitcoin that aren’t supported by fundamentals.

When ordinary folks are buying Bitcoins with Visa and MasterCard, it’s time to get nervous. Thus endeth the lesson. Let’s do the numbers.

Tuesday Market Wrap

  • DJIA: +1.09% or +255.93 points to close at 23,836.71
  • S&P 500: +0.98% or 25.62 points to close at 2,627.04
  • Nasdaq: +0.49% or +33.84 points to close at 6,912.36

Tuesday’s Big Gainers

  • Interpublic Group of Companies (NYSE: IPG) +4.39%

Ad agency wins $1 billion-plus contract from Amazon (NSDQ: AMZN).

  • Emerson Electric (NYSE: EMR) +3.67%

Factory automation maker drops bid to buy Rockwell Automation (NYSE: ROK).

  • Goodyear Tire & Rubber (NSDQ: GT) +2.98%

Analysts bullish on Goodyear amid strong auto demand.

Tuesday’s Big Losers

  • Boston Scientific (NYSE: BSX) -7.47%

Medical device maker fuels rumors by canceling out of conference.

  • Advanced Micro Devices (NSDQ: AMD) -3.29%

Pessimistic projections hurt chip making sector.

  • Incyte (NSDQ: INCY) -2.07%

Biotech’s drug development encounters obstacles.

Letters to the Editor

“Can you recommend any so-called Trump stocks?” — Tom B.

It’s logical to think that Trump’s policies will benefit certain industries. The president vows to hike defense and infrastructure spending; the assumption is that defense and construction firms would reap a bonanza.

But don’t indiscriminately pile into these sectors. Not all companies will benefit. Winners and losers will emerge. Also note that Trump is having trouble keeping his promises. The president’s meeting on Tuesday with Senators did little to move the needle on tax reform.

Don’t make your portfolio hostage to daily headlines. Cable news thrives on drama to boost ratings. In today’s choppy seas, you can navigate a steady course by focusing on earnings reports and economic data. On those fronts, the news is heartening.

Pick companies with strong balance sheets. Beware of the glib themes you hear on TV. They make good sound bites, but lousy investments.

Got any questions or feedback? Drop me a line:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.


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