Market Euphoria Is Here... But a Dangerous Time Is Coming
Editor's note: The "fear of missing out" has grabbed hold of the market...
These days, everybody wants in on the "Melt Up" – the explosive gains that True Wealth editor Steve Sjuggerud believes we'll see before this decade-plus bull run ends.
But the new investors in this horde aren't buying stocks because the businesses are great... or because valuations are cheap. Instead, they're snatching up everything they can, hoping that somebody will pay them even more for the stock as the market keeps going up.
It's the "Greater Fool Theory" – as Steve noted in last Wednesday's Digest. But even though the trend is built on a false foundation, you can – and should – still take advantage of it...
In today's Masters Series, adapted from the December 2020 and January 2021 issues of True Wealth, Steve explains why you should continue to ride this trend for as long as you can... how we can tell that euphoria is taking off... and what we can take away from it...
Market Euphoria Is Here... But a Dangerous Time Is Coming
"One billion dollars? You call that a position?" legendary fund manager George Soros once asked his trading partner Stanley Druckenmiller.
Soros continued, "It takes courage to be a pig."
His point was, when your trades are working, you have to go for the jugular. At Soros' urging, Druckenmiller doubled that position to $2 billion. The trade went dramatically in their favor, and they made far more money.
Soros may be better known today as a billionaire who funds a lot of political causes. But in the 1970s, he was the best investor on the planet... far better than even Warren Buffett.
His Quantum Fund returned 4,200% in the 1970s – when the S&P 500 returned just 47%.
How could Soros outperform the market so dramatically? Early on in my career, I wanted to figure that out. And today, I'll share what I learned... and how you can put it to work for yourself.
I graduated from the University of Florida in 1992. That same year, Druckenmiller recounted some of the lessons he learned from working with Soros in an interview (shared in Jack Schwager's book, The New Market Wizards).
When asked what the most important thing he learned from Soros was, Druckenmiller replied...
It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn't maximize the opportunity.
It's hard to believe these words of wisdom are nearly 30 years old... because the lessons of Soros and Druckenmiller apply perfectly today.
I hope you can see the influence of this idea in my writing. Even though the stock market keeps pushing higher and higher, I have urged my readers to keep taking advantage of the "Melt Up."
"But Steve," you might say, "This trend is built on false foundations. I can't invest in that!"
You're right about the trend... But, yes, you can!
Again, Soros' approach tells us so. Here's a quote of his from the early 1990s...
Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.
This is exactly what we're trying to do here in the Melt Up.
Twenty-somethings are trading tech stocks on their phones. They're buying cryptocurrencies. They're speculating – in a way I haven't seen since, well, the last U.S. Melt Up in 1999.
Is it some fundamental change to our economy that's driving them to buy already-expensive stocks? No. It's far simpler than that.
Animal spirits have kicked in among investors. "FOMO" – fear of missing out – is here. That's it.
These new folks getting into the market aren't interested in investing because they had a great idea, but because of the FOMO happening in the market today.
Simply put, we're reaching the point where the "Greater Fool Theory" kicks in... when the only reason someone buys a stock is because they think a greater fool will come along and pay them a higher price for their stock. It's not about the fundamentals of the economy or the business – it's sheer excitement.
Thinking of it this way makes it much easier to step off the Melt Up trend before it's discredited.
We're not living in a magical new time. This is a trend with a false premise. But it still takes courage to be a pig in times like these.
My plan is to do just that... ride the current trend... and then step aside before it's discredited.
I hope you'll do the same...
You see, the stock market Melt Up is here – and so is the euphoria that goes along with it.
If you've been watching the markets, I'm guessing you can feel it. Sentiment is as much a feeling as it is a tangible thing. But there's plenty of hard evidence to back it up, too.
Proof of the Melt Up is everywhere today. An obvious clue is the initial public offering ("IPO") market.
Companies tend to come to market when times are good... or more specifically, when valuations are high.
There were 480 IPOs in 2020. That's the most we've seen since 1999. And it's up more than 50% from what we saw in 2014, the second-biggest IPO year of the last decade. Take a look...
IPOs were a major theme of the tech bubble. Hundreds of companies went public because money was flowing and times were good.
Many of those stocks would soar triple digits on their opening day. And we've seen the same thing recently in many high-profile IPOs.
In December, DoorDash (DASH) and Airbnb (ABNB) both went public. These companies each used a special "hybrid auction" to allocate shares to investors. The idea was to have investors bid a price in the hopes that the actual IPO price would come close to the true market value at launch.
If it worked, we wouldn't have seen these stocks soar on their opening days... But it didn't work.
Instead, DoorDash soared 86% when it began trading. Airbnb jumped 115%. Those are high opening-day moves in massive businesses. And it shows the incredible investor demand for anything exciting in today's market.
More important, when you put this in context with the above chart – with total IPOs surpassing 2000 levels – the point is clear... IPO euphoria is taking off in the market today. And that's Melt Up behavior at its purest.
IPOs are just part of the story, though. According to Citigroup, overall euphoria recently hit its highest level since the early 2000s...
That's according to the company's Panic/Euphoria Composite Index, which looks at factors like margin debt and options trading. It recently showed dramatically higher euphoria than we ever saw during the 11-year bull market. And it's nearing 20-year highs, too.
Simply put, everyone's bullish. And they're behaving accordingly.
Again, the takeaway from all of this is clear... Market euphoria is here.
That's not a bad thing. It's exactly what we expected when the Melt Up began to take hold. But let's not kid ourselves... This is a dangerous time to be an investor.
It's dangerous because while times are good now, we know what happens next. After a furious Melt Up comes a crushing "Melt Down."
Tomorrow, I'll share how you can protect yourself from that looming risk.
Good investing,
Steve Sjuggerud
Editor's note: You shouldn't sit on the sidelines during the Melt Up's final stages... but you should have a plan in place for when it ends. And that could be sooner than you expect...
Steve believes a Melt Down will begin in the financial markets before the end of this year. That's why he recently started sharing the No. 1 thing he believes you should do today to protect your Melt Up gains.
It's a strategy that takes your emotions out of the game, so you can figure out the exact moment to sell your stocks. And it'll put you in position to secure your wealth... and not simply watch your gains evaporate when the Melt Down arrives. Get started right here.