Markets have been on the move in recent weeks, and volatility could see some expansion in the weeks and months ahead. There has been very little, if anything, to stand in the way of higher stocks. Markets remain strong, and fresh all-time highs will likely be seen again before things eventually turn south.
Stocks have done a good job, thus far, of focusing on the positives while essentially sweeping any negatives under the rug. This trend will not go on forever, however, and in fact could be getting very close to a conclusion. Numerous issues could potentially put the brakes on the ongoing rally in equities, and when the selling finally starts it has the potential to accelerate quickly. In fact, a decline in stocks of 20, 30 even 40 percent or more cannot be ruled out.
One potential clue that such an inflection point may be on the horizon is the notion that stocks have finally entered the “FOMO,” or the Fear Of Missing Out phase. Investors that have stood on the sidelines, waiting for the “big correction” that never came, are finally unable to tolerate the market moving any higher without them. These investors are now jumping into stocks, and recent inflows suggest that there is significant cash that could still be put to work in equities.
This could be the beginning of the end...
Stocks could now potentially see a strong “melt up” as all of this remaining investment capital finds its way into the market. Another double-digit percentage run higher could be seen in equities before the bottom finally falls out. Markets have a tendency to inflict as much pain on as many people as possible, and it’s usually once every last investor has gotten long.
Not only has the market seemingly entered what could be the final phase of the current bull market, but numerous outside influences could also play a role in a major reversal in stocks and risk assets. The geopolitical landscape remains a potential powder keg. The recent U.S. tax cuts may not have the anticipated effect on the economy. The U.S. Federal Reserve could get more aggressive with monetary policy. Credit is tightening. The list of potentially bearish issues cannot be disregarded indefinitely, and at some point they could weigh heavily on equities.
Some investors seem to have seen the writing on the all and are paying attention. The potential for a major shift in market dynamics, including a possible reversal or even collapse in equities along with a weaker dollar, has likely played a major role in gold’s recent upside. This trend may not only continue, but could quickly pick up speed if there is a sudden and severe increase in stock market volatility.
Recent price action suggests that stocks could be nearing the end of the current bull market just as gold gets ready to embark on what could be an extensive run higher. The warning signs are there in plain view. It’s up to you whether or not to heed the warning.