The Stock Market tends to be 'mean reverting' … meaning when the pendulum swings too far in one direction, it makes sense to expect it to swing back in the other direction.
Recently, the equity market rally has surprised people with its size and duration. Seemingly everywhere I go, there are traders talking about how they expect a 'Top' but "don't want to fight the Fed."
Yes, price is up and so is the trend …but how unusual is this year's big move up?
The answer is that it's been 'pretty typical'.
OK, big one-year returns can be 'normal,' but this has gone on for three years … how unusual was that move?
The chart below shows that the returns for the past three years were not unusual, and fits nicely in the fat part of a somewhat normal distribution.
While it's reasonable to argue that stocks are getting expensive, it may be premature to bet that stocks are doomed to crash.
Observation and cautious action often pay better, over the long-term, than fear or greed.
