There are many that think the market is overvalued and should go down. Some that are permabears think that the market has been overvalued since 2008 and have followers that feed on fear that believes the same. But will the market really correct over 20%? Of course, it could and it has in the past but what’s the catalyst for a move down? Overvaluation?
Overvaluation alone is seldom the reason for a crash. But 1987 seems to be the last crash that there was really no one single catalyst for the 22% move down in the DOW. Before black Monday, there was a 4% and then a 2% move down and then it went down over 20% in one day. At that time, the Fed was not providing liquidity and there were no circuit breakers. It took two years for the market to recover.
In 1999 any company that had a dot.com after its name was awarded huge valuations. That was truly a massive bubble that burst and the warning signs were pretty clear.
Then there was 2008, where the S&P went down 54% from top to bottom. Another bubble but much more severe than 1999. Many banks went bust and not just a couple of the large ones that most talk about. 2008 was a bit harder to detect since the only signs were in the real estate market. Many were taking cash from their homes since it was so easy to refinance and moving that money into the stock market.
Then there was Covid where the market dropped 26% in a month’s time. That made total sense since most economies around the globe were shut down. The recovery was very quick since the Fed acted early and aggressively and there was coordination with congress. What has been so remarkable is that the pandemic forced companies to make changes that would normally take 4 to 5 years. So it brought about significant efficiencies that would’ve never have happened so quickly without the pandemic. The savings rate also went up astronomically and now there is significant pent-up demand. With so much liquidity and so much money ready to be spent, it is hard to think that just because there are some stocks that are overvalued, that there will be a crash. However, many stocks have corrected and some have corrected by a lot. So it seems that that market is doing the job of valuing some companies correctly. But where we are today, it is just not the recipe for big move down and I have been in the bearish camp before.
What are your thoughts?
Founder | SimpleOptionStrategies.com
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