THE ROLLER-COASTER RIDE. IS IT TIME TO GET OFF?

According to the Elliot Wave Theory, all markets act cyclically while people think linearly.

What that infers is, if a recent trend has been upward, then people believe it will continue to go up no matter how long the trend has been going on, the absolute amount of the increase and in spite of any news to the contrary.

We have been in a bull market for 10 years, the longest in our recorded history.

It has been said another way: First, investors require an explanation to justify an investment.  That morphs into an extrapolation and then into an exaggeration.

Booms always turns into busts.

Right now, the stock market is overbought by about 40% from the norm.  The norm is usually represented by the P/E ratio (price to earnings ratio of the market).  The 100 year norm is 14.  The current market P/E ratio is over 22.

It does not take a rocket scientist to see that a correction is due…and it may already be under way.

The market has risen on the backs of just a few stocks.  Alphabet, Amazon, Apple, Face book, Microsoft and Netflix have accounted for 37% of the rise of the entire S&P index.

And China is in a similar precarious situation with just two companies: Alibaba and Tencent accounting for 28% of the rise in their entire market.

But since the start of September, the median drop in those eight American companies has been 21%.  That has wiped off some $900 billion of market value.

The carnage has spread to other countries and other stock markets, reminding investors of the old adage: “When America sneezes, the world catches cold.”

The brokerage houses are still hyping Uber, a company that has never turned a profit, suggesting it’s worth a hundred and twenty billion dollars, double its current valuation.

While growth rates of the tech stocks is still in double digits, they are about half of the growth rate of the previous year.

For the tech stocks to warrant their current valuation, they would have to triple their profits over the next ten years…while all indicators show profits slowing due to rising capital needs as each new product demands ever more investment.  This is called the theory of “Low Hanging Fruit.”

In desperation to boost sales, the tech giants are throwing more money into riskier ventures.  And they are moving into each other realms, where they are vying for a bigger share of a limited pie.

One estimate of returns for the tech giants shows a drop from 40% in 2013 to 24% this year.

The six big American tech firms account for 20% of all investments of the S&P 500 companies.

If you need more reason to get out of the market, then you are a die-hard optimist.  I wish you well on your journey from the top to the bottom of the market.

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