While it's true that a bell doesn't ring at market tops (or bottoms) it is also true that valuation and psychology matter when determining prospective returns and risks in markets. Complacency implies more (not less) uncertainty about future outcomes as some probabilities are excluded a priori. Stretched valuations in asset markets imply lower (not higher) expected returns in the medium term. At high levels of valuations and high levels of complacency I have low conviction that the near term returns will be sustainable; the current speculative returns on capital will risk becoming negative returns of capital in the median term.
China is unraveling, one tenuous, credit woven thread at a time. Seemingly insignificant corporate / trust defaults, a weakening currency (piloted or not) and the devaluation of debt collateral (see copper and iron ore futures). Problems aggravated by rampant rehypothecation.
The Shiller CAPE is at 25, a level associated with mediocre (0% to 2%) stock market returns in the subsequent 5 to 7 years. Margin debt is unsustainably high as is bullish sentiment (85% bulls).
Credit markets are very active. Corporate IG grade issuance to finance stock buy backs is exploding at spreads that leave little room for protection when the credit cycle turns. New High Yield bond issues have increasingly fewer protective covenants, at low absolute yields and insufficient spreads.
Risky assets in general are not inexpensive, risk is the crowded trade. We're closer to the end than the beginning of a large cyclical bull move in stocks (S&P 500 666 in 2009). I'm not calling a top, I simply believe that the easy money has been made and at these valuation levels there are insufficient prospective returns for the risks assumed. Markets may continue to levitate but the speculative returns in this phase will probably prove temporary and I think it's better to have less capital at risk until valuations and psychology become more favorable to investing.
