This one is from The Veteran.

His 3 decades in markets might just provide a bit of a broader perspective on things...

Or are we in a totally different regime where valuations don't matter?

I'll leave that for you to decide.

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US equity markets enjoyed some of their best returns ever in November- the Dow rallied by 13% and had it best month since November 1987.

The S&P 500 was up +11%, in the 11th month of the year. And that was the best monthly performance for the index or its equivalents since 1928!  

Those US index performances were put in the shade by returns seen in Europe - Spain was up by 28% and Italy by 23% - those figures represented the best monthly equity returns in the countries history.

Flows into equities during November amounted to $115 bln according to data from BofA, £25bln of which went into emerging markets, while $9.0 bln poured out of gold traders moved out of risk-averse assets.

Although not completely because $2.0bln found its way last week into TIPS or Treasury Inflation-Protected Securities - The US equivalent of the UK’s index-linked gilts.

At the same time, US markets made new all-time highs - the Nasdaq 100 index is up 43.0% year to date.

The kind of performance that drove Bank of America to describe equity rally in 2020 as GOAT and to draw the chart below to illustrate their point.

Meanwhile, private clients allocations to cash continue to fall as equity weightings rise.

Once again BofA research illustrates the point - this time drawing on data from its own wealth management business.

Elsewhere other indicators are also suggestive of a possible market top.

For example, the widely respected Investors Intelligence Advisors sentiments index swung to readings of 66% bullish, its highest levels since January 2018.
The index measures the sentiment among market newsletter writers and when it reaches extremes readings it is considered to be a reliable reverse indicator.

At the same time, the CME equity put-call ratio, which measures the relationship between bullish and bearish options trades has fallen to a 20 year low, implying that most traders are balls out long of the markets.

A view that’s confirmed by this chart from @soberlook which sheds light on the outstanding short interest with the S&P 500 stocks

And this chart of the CNN Fear and Greed Index (which tracks 7 indicators of investor sentiment) shows readings of extreme greed.

None of these is a smoking gun in its own right and even in combination, they do not categorically make the case for a market top.

And indeed were I of a mind I could probably spin a bullish case based on these indicators with talk of record-breaking momentum and inflows and the prospect of a Covid free 2021, under the leadership of a new US administration.

However, I am not of that mind or persuasion.

I think these indicators paint a picture of irrational behaviour, of a headlong rush to get into the market.  

Looking at Novembers gains its hard to argue that there was anything wrong with that, as a short-term tactical play.

However, the question we must ask now is what will the markets require from 2021 to justify their new valuations. According to Barrons magazine the Nasdaq 100, trailing PE ratio is 38.45 times,

Perhaps surprisingly the S&P 500 is even higher at 41.65 times, those figures are up from 26.15 and 24.36 times respectively a year ago.

I will leave it for you to decide if economic conditions and the prospects for earnings have improved or deteriorated over the course of 2020.

My takeaway is that they have not and that increasingly stocks market indices are priced for perfection which as we know is notoriously difficult to achieve.