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Portfolio: What I am planning to do in the markets and with my portfolio
There is nothing wrong with a little bullish investor behavior given how strong the US market has been over the past 25 months (since Nov 2022).
But this week was a bit different…not just another “ordinary” week of market bullishness.
What was unique about this week was the volume of “over-the-topness”…like an overflowing tower of champagne glasses.
The high-fiving, the self-congratulating, the number of investor portfolio YTD return declarations…and perhaps even sadder was the increasing amount of “enjoy staying poor” trolling from the memesters to anyone who dared to question their investing theses in the past.
Here are my three favorite contrarian warning signals of the week
Bitcoin crossed above $100k and the laser-eyes and rocket emojis exploded on social media and crypto trading chat lines.
David Rosenberg, a perma-bear WS investor, turned bullish…and he even apologized for his bearishness.
Blackrock declared that the world economy has now entered a golden period …”due to a fundamental shift driven by the emergence of mega forces including artificial intelligence technologies.”
One analyst captured the situation perfectly…
stocks at all time high
home prices at all time high
bitcoin at all time high
national debt at all time high
core CPI inflation >3% for 42 straight months
and the US Fed expected to cut rates again in about 10 days
But then another trader also said it perfectly…Things are looking “a bit” silly but they can always get sillier, no question.
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Table of contents
Beachman recommends
Market signals
Beachman’s plan
Conclusion
Upcoming exclusive paid content
Beachman recommends
Each week, I share a recommendation for an app, a book, a website, a podcast, a publication, a movie…anything that I find interesting and useful from an investing and financial management perspective. I don’t get paid to do this. Beachman’s Newsletter has and always will be an ad-free publication. So here goes…
Top traders unplugged
This podcast by Niels Kaastrup-Larsen is quickly becoming one of my weekly must-listens. They bring on a diverse set of guests from the investing and trading community covering a variety of assets, styles and points of view. Cem Karsan, one of my favorites, is regularly featured on this show for his market commentary.
One of the most interesting episodes was about the future of money. Give it a try and don’t get intimidated by the technical nature of some of the content. You can always skip episodes that don’t interest you…I do that all the time. But the ones that I consume are gold mines of knowledge and information and food for thought.
Market signals
In mid-Oct, I wrote that we are in a window of opportunity…to position our portfolios for a possible year-end rally and enter stocks that could have strong 2025 tailwinds. That is exactly what we have been doing in the Beachman community.
Then four weeks later, in mid-Nov, I pondered about whether the santa rally is already priced in markets and on the decline. I used the topping signals to take gains on several overbought and overvalued positions.
And last week we were wondering how much juice is left to squeeze before year-end. I took some more gains off the table.
Even though I wrote about how difficult it is to hedge in this market, I think we need to try because the over-the-top signals are now too loud to ignore.
Indexes
The current bull market is 25 months old and up more than 70%. It could continue running for a while longer. Looking at the charts below, nothing is flashing a sell signal yet. The Nasdaq and the Mag7 indexes are looking quite overbought, but no sell signal still. Everything else is chugging along while the markets are playing marbles.
But under this bullish surface…behind the curtain…markets are showing signs of cracking…built-up steam that might soon need the release value to be opened for a bit.
This week more stocks declined than those that advanced. This happened every single day this week. Yet the SP500 hit a new all time high 4 times. This has not happened since 1928. Yup…
Daily market trading volume has declined steadily even as the indexes have risen relentlessly. Volume in the Mag7 stocks as measured by the 50-day volume average has dropped to levels last seen in late-2021 and early 2022. We all know how 2022 shaped up to be.
Investor sentiment
60% of the US is invested in the stock market in some way or the other - direct ownership of stocks, 401k plans, retirement investment accounts etc. So any time that markets are up and rising, interest in stock movements jumps and there is a greater tendency to want to jump in with new capital.
In the options markets, we see this ultra bullishness in the Call to Put ratio which is close to the high levels of end-2021…right before markets reversed lower. Hedge options are at some of their lowest prices ever…no one wants to hedge.
Valuations
The Shiller PE ratio for the SP500 is now at 38…the second highest in the history of the stock market. This PE (price to earnings) ratio is the price earnings ratio based on average inflation-adjusted earnings from the previous 10 years. Imo, this is a more meaningful backtested valuation metric to use for the market as a whole.
Even if we look at the forward PE for the SP500…it is at 23…much higher than the historical norm of 16…it was 15 when markets bottomed in Oct 2022. This does not leave much room for error…meaning if earnings do not meet expectations in 2025, then stock prices will fall.
Software stocks seem to have caught investor favor recently. However they seem to have risen beyond their valuation skis in some ways. Growth adjusted forward revenue multiples for software stocks as a sector are 2x higher than their historical levels.
The PE premium between the US stocks and international stocks jumped significantly in November. We are about 68% richly valued than the rest of the world. This is the highest it has been in five decades. For reference, it was 54% at peak 2021 market levels.
Meme trading
Meme stocks and cryptos seem so easy to pick on as joke investments. But the sad part is that many of them are just so. Folks YOLOing into the latest crypto altcoin trying to buy low and sell high. The problem is that someone has to be the bag holder once the selling starts. Like the story of this trader who lost $1.4M in 15 minutes when he sold his Moodeng crypto (named after a zoo baby hippo that went viral) to buy Hawk coin (recently launched by the Hawk Tuah girl).
Prices of Bored Ape NFTs…remember those digital monkey pictures?…have doubled in 5 days! Pet rocks and painted coconuts are going to be the next hot, must-own…buy them now!
Google searches for “meme coin” have 3Xed in the past 10 days. Everyone and their uncle wants to get onboard now.
Last week, a new real estate etf was launched that will own both real estate and Bitcoin…apparently the cash flow from real estate will be used to buy and hold BTC. Michael Saylor has given birth to a new cottage industry of complex financial instruments…as Borat would say…”Very noice!”.
And then we have stocks like PLTR that is shooting for $100 and APP gunning for $500…sure why not…these companies are going to capture all the world’s AI and adtech business…in 2025. Have faith in all the online declarations of how great their products are. Want to have some fun? Go to this site OpenInsider and search for your favorite stock to check if any insiders have been buying the stock. PLTR management has been dumping the stock onto retail investors by the $billions, while their board approved stock repurchase program has not made any buys in months. PLTR sports a $160B market cap at a PE of 150. ”Very noice!”.
Dec 20th options expiration
We talked about this last week and we will continue to track this until it passes…because it is such a monster market-moving event. Across the SP500, Nasdaq and small cap indexes, about $1.55T in options are expiring on Dec 20th. About 80% of this volume is bullish call options.
The number has come down from a week ago as traders have been closing their positions to lock in gains or rolling over their options to future dates.
So what do we make of all of this?
First of all, let me be clear that I am not expecting a market crash any time soon. The US is the strongest market in the world and it continues to attract investments from all corners of the globe. US ownership of stocks are at their highest levels and the wealth effect feels nice going into the Holiday break…retail investors are likely to stay invested and perhaps even put more money into the markets.
What I am specifically seeing and saying is that markets will soon need to let off some pressure to keep going higher. We could get an interesting dip in the next few weeks and that is what I am trying to navigate through.
I have more serious concerns about H2 2025…but that is the topic for another post…we will cross that bridge when we get there.
For now, we need to be like water…
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Beachman’s plan
Given the market signals discussed above…
…given the key questions that I am researching…
…my simple, actionable, measurable investing plan is as follows: