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During the current unprecedented global pandemic, the stock market is hitting new highs, primarily driven by growth and tech stocks. Back in March 2020 when we moved into bear market territory, no one would have predicted the market would rally back so fiercely. Various indicators are flashing that valuations have reached even higher levels than the 2000 Dot-Com bubble! The US stock market capitalization to GDP ratio has eclipsed 190%, greater than that of the 2000-2001 high.
What is behind the market rally? The Federal Reserve’s massive policy action, including unprecedented bond buying, zero interest rates and $5 trillion stimulus package, has caused the shift from bear market to raging bull market, with tech stocks leading the way. The chart below of the Nasdaq 100 demonstrates the recent asymptotic performance. What is more astounding than these valuations, is that they are occurring during a global pandemic unlike anything we have ever experienced before. It’s clear that valuations have gotten out-of-whack with the current economic reality.
While it may be relatively simple for some people to identify a bubble, the more difficult part is determining how to trade a bubble. In the current strong bull market, its difficult to ‘Fight the Fed’ and short stocks. As the adage goes, the market can remain irrational longer than most can remain solvent. In fact, some more well-known investors, such as George Soros, take the opposite approach and tend to buy into bubbles, while being cognizant of their eventual correction. No matter what approach you take, it is very difficult to time the market.
At Algorithmic Futures, we are not attempting to discretionarily predict market movements. Instead, we use quantitative research and analysis to identify a portfolio of trading strategies that can outperform in any market. Furthermore, the portfolios are biased toward higher volatility markets, such as those seen in 2008, and more recently in 2020. No one knows where the market is headed in the future. However, if there is continued volatility, Algorithmic Futures trading strategies should benefit and outperform in these types of market environments.
