The Runaway Train — The Dow’s Rise to 26,000

With a brief rise above 26,000 yesterday followed by a market retreat, the Dow made its move today and closed above that number for the first time in its history.   It took approximately seven days for the Dow to rise from 25,000 to 26,000.   Yes, there is nothing wrong with your screen, it was only seven days.   Certainly one move for the history books, as this was the fastest rise in one thousand point numbers in history.

This was a major feat for the 120 plus year old market index that has risen approximately thirty eight percent (38%) since the 2016 Trump Presidential Election upset.   Many pundits theorize that the current run in the stock market is due to Wall Street being focused on rising corporate profits.   This combined with strong economic growth around the globe made way for the extra push given by the new tax reform bill.

The bill which reduces the tax burden for large multinational companies that have made billions overseas can now repatriate their capital and invest it into the economy in the United States. One such announcement made today is that of household name Apple. Apple which has an extremely large cash position on its balance sheet (the size of the GDP of a medium sized country) plans to repatriate almost all of its more than $200 billion offshore cash position. The company claims it will be paying some $38 billion in taxes and then reinvest the remainder into the American Economy through a series of initiatives. This will coincide with their announcement to build another corporate campus within the United States and add some 20,000 new jobs.   Apple stated today that it will be investing over $300 billion in the economy here in the United States.    This is exactly the kind of investment the Trump administration was hoping for by changing the repatriation tax.   But, how does this translate to the overall market?

The stock market is swallowing news like this and spitting it out with record-breaking index moves that are faster than one can even pay attention to.   Even though at this level the move from 25,000 to 26,000 is not as large on a percentage basis as say the move from 11,000 to 12,000 the market is still on a fast forward spiral to the stratosphere.

Market pundits and economists are extremely concerned about what has been determined to be the institutional and retail investor’s fear of not being involved.   As this continues the irrational exuberance could potentially get very far out of control.   According to some economists the market has had such rapid price increases due to it being all emotionally based.   As any professional trader will tell you, the fundamentals do not warrant the fast run up in value. Typically quick increases in stock market value are followed by larger decreases in value.

As Michael Block put it in an interview recently, the Chief Market Strategist of Rhino Trading Partners, “the fear of missing out is resonating, if not screaming”.   Mr. Block, like so many other strategists on the street are questioning whether or not the increases have been too fast.

Certain stocks have gone up more than the overall market and that has given some fundamental analysts cause for alarm. Even though the increase in value here has been caused most recently by the changes in the tax law. Corporation after corporation have had price increases due to the fact that they will be paying less in taxes, which fundamentally increases their cash flow and profitability.  Which then translates to a higher per share price and therefore a larger market capitalization.

What seems to be occurring is what is commonly referred to in the market as a “melt-up”.   As investors continually pile into stock after stock not wanting to miss it, there is the growing sign of the other part of the equation, the inevitable “melt-down”. What happens right before that begins is that investor sentiment is at an all time high. The sheer euphoric nature of the market is driving buyers into issues, which will end like a game of musical chairs. The music will stop and there will not be enough chairs to go around……………..

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