TDI Podcast: The Emperor’s Clothes Again (#946)

28:00You get nothing. Then your entry point of last resort is going to be the bull market definition. This is true. Like the bear market definition is going to be your exit point of last resort. But of course, we have plenty of tools in our toolbox to derive buy and sell signals.

28:24So here we are. So I don't know if... You know, I get it. I get it. I understand. Here we are in an unusually strong, very quick bull market. You're saying, I'm just going to repeat this back to you. You're saying it's a new bull market, which has different characteristics of a old bull market, let's just say, because old bull markets run out of steam. Right. And then they kind of roll. But both could happen. But I'm just saying, generally speaking, an old bull market could run out of steam. It could be exhausted after a while. And you'll see that at the end where people just finally say, screw it and capitulate on the inside by throwing their money in.

29:04Right. Whereas a new bull market, it's like a lot of people were out to bring in new investors. It has a lot more gain potential. That's where you get the Marty Zweig thrust indicator as strong as we saw it back then. And it has different characteristics, which could, in effect, last a lot longer. Is that the summation of what you just said? Yeah, that's it. It's a new bull market. And the strongest rally, the bull market, are the first six months. Don't forget that as well. So we're right now at the end of that six-month period. Ah, my friend, yeah, because now I expect a little bit of choppiness.

29:42Yeah, it's going to get a little bit choppy. Now, but it's funny because it's funny. I mean, look, I've been very vocal about, look, I said, there is a lot of wrong with what's going on out there. As a matter of fact, at the top of the show, I talked about the fundamentals, that the price, you didn't hear this, so I'll repeat this for you. The price earnings ratio of the S &P 500 on a forward basis on October 31st was 23.1, which, by the way, was the highest since like 20 years, I think. And that's a lot. You know, the average, let's say, 10 year is 18.6. 23.1 is a lot. So the idea that we can continue just going up and up and up.

30:32Look, bull markets could last a long time, but every once in a while, we've got to refresh, don't we, inside of the bull market? Yeah, we need a refresher. And I think it's coming right now because even though it's a young bull market, first off, the first six months of this bull market have elapsed. So it's young, but the first big thrust is over. Furthermore, we had the Zweig, I think it's in English. Zweig, Zweig. Zweig. Thrust. Yeah, Zweig. In German it would be Zweig, but you can also do that. Zweig, Zweig, breath thrust. But if you look at the historical thrust, we have achieved in six months what is normally achieved in one year.

31:15So in other words, more. We've achieved more than what is normally achieved in one year. So in other words, I think that lots of the powder is already burned. Yes. Thrust was very powerful. Furthermore, we had capitulation. So we had all the ingredients at New World Market, capitulation and thrust. So we had really a triad, a very bullish triad. But most of this powder is already burned because, okay, capitulation also takes higher prices. But we had an unbelievable run. I mean, think about it. I mean, the vision that I have from what you're talking about is like a rocket going up to space. That initial thrust is the most powerful of what you can get because it needs to lift off.

32:01And then it separates and we get the solid rocket boosters that go down. And then we get from there a change of the next secondary thrust mechanism. And then potentially then it's just operating on much smaller thrusters to keep the velocity going. Right. It's momentum, yeah. So, again, this idea of a... So what are you looking at that would... Let me ask you this. All right. I get it that you are cemented in, that this is a young bull market, and that, you know, it's going to last. What would change your mind? What is the next thing that could happen? Like, in other words, tell me what happens if you're like, well, okay, that's what it was, but now all of a sudden the signals are changing.

32:47Two things. I don't know. Liquidity and earnings. So now there are tensions with liquidity. You know, the repos, there is some tensions in the liquidity markets. But I consider it is a liquidity small crisis, but not a solvency crisis, which is important. Okay, so not a solvency crisis. Okay. No, it's not a solvency crisis. It's just a liquidity crisis because you know better than I, the TTA account, Federal Reserve, all these things. So the Treasury is draining. It's draining liquidity from the system. There is the government shutdown. So receipts keep coming in, but there is no expenditures.

33:32And well, all these things, it was the end of the month, which is also window dressing for banks. So all in all, there was some liquidity issues, but it's not a solvency issue. Okay. So I would change my mind if this, what I consider, is just a temporary liquidity issue turned into a solvency issue. Then what you have to look at, then look at high yield bonds. In the very moment you see that the spread of high yield bonds starts to boom, to rocket, then we may, then Houston, we have a problem. Yeah. So, but the liquidity issue, it's interesting because one of the big drivers of liquidity this year has been, you know, with one big beautiful bill act, the OBAA.

34:18Yeah. One of the big things was, oh, my gosh, wait a second. We're going to extend the tax reductions, the tax rates that we have, right? And we're not going to have any receipts. You know, that was on a budget that was based on something else back then. And they're like, don't worry, don't worry, don't worry. We got the tariffs coming in that will, you know, shore up some of the billions of dollars. and all of a sudden now we have the tariff issue that is under pressure, potentially with the last look at what the Supreme Court did last Wednesday, or at least the questions they asked. They didn't do anything.

34:49But the questions they asked, I don't think that necessarily, but there's been a big concern about the U.S. quality of our bonds. I'm talking about a sovereign bond, so I'm not talking about junk or anything like that. But the sovereign bonds, because there's been a big concern about the political, I don't know, chaos that's going on here. Our debt to GDP. We used to laugh at your home country, Spain. Remember that? Yeah. Look at the debt to GDP of Italy. I think Spain was part of the pigs, wasn't it? Right? Yeah, but I think there is a big difference with the USA. What's the difference? You work harder, you have cheaper energy, and you have less regulation.

35:32So I think the debt burden of the USA is not comparable to the debt burden of Spain or even now Germany. It's not the same when you owe$1 million to the bank, but you make every year$1 million. And furthermore, your prospects are bettering, are getting better. And you expect to make next year$1.5 million because you're really doing very well in your job. than being indebted to the bank$1 million and your salary gets cut by half. And then you only make half a million. So I think, I tell you very frankly, if you avoid civil war, I tell you as bluntly as this, if you Americans avoid civil war, I think you will end up well.

36:21I think eventually your debt will be repaid because you're going to create, you have cheap energy. Europe does not have cheap energy. You have cheap energy. You have much less regulations than Europe. And furthermore, the trend in the USA is toward less regulations, not more. Just the opposite as Europe. And furthermore, you work hard. So you are, look at France, for instance, we talk about debt, sustainability of debt. Look at France. In the very moment, a prime minister says that they maybe should cut down some entitlements. Look, the country's on fire, literally. The country's on fire. So I think it's a very different situation.

37:03My only concern... Since we're giving out advice about countrymen, I would think that if Spain would take short of siestas in the afternoon and eat earlier in the evening, not at like 10 o 'clock at night, that maybe there'll be more productivity there. What do you think? We have to work harder. Look, in Europe, there are lots of vacations. So many vacations, holidays, they call them. They don't call them vacations, they call them holidays. No, holidays in Europe, vacations in the USA. But anyway, it's not working. It means you sit idle, you sit idle, whatever you call it. France is even worse than Spain, because we stereotype Spain a siesta.

37:46But to tell you the truth, I am more optimistic with Spain than with France. even though I'm very pessimistic with all Europe. France is really, I believe, six weeks vacation, then furthermore, now they say they want to work Fridays off. So they are working already 35 hours a week. This is already from a long time ago. And now they are talking about Friday free, not casual Friday, no, no, Friday free. Friday free, yeah. So you're not going to solve your economic issues by working less. So this is why I still think you have a decent possibility in the USA to pull it off, really. Increase productivity.

38:34I think you can make it. So aside from those issues with regard to the liquidity, civil war, of course, that's not good, or things like that, I'm talking about technical indicators. What do you have to see turn to get you to the next point. Okay, you know what? We are now potentially rolling and we have to make a change to our allocation. Well, first off, my time indicators. You know, I live and die. My time indicators, they really work very well. But okay, if I set aside the time indicators, then it's going to be earnings revisions, not declining earnings, because when you get the decline in earnings, the market is already down.

39:18So you have to look at the rate of change of earnings revisions, which is more important. So I always pay attention to the rate of change of earnings revisions. And secondly, once again, liquidity. So I pay attention to what's happening to a repo market, to high yield bonds, all these indicators of liquidity. And don't forget what's doing China because it's a global market. If China is inflating, there is a spillover effect. So some of this liquidity will also end up in the USA. Yeah, any kind of stimulus from anywhere somehow always finds its way into risk assets. Permeates, permeates, it spins over.

39:58So I keep an eye on the USA, but I also keep an eye on China. So for instance, now we are to a little extent contracting liquidity, but China is expanding. So we have also to keep an eye on China. And more luckily, we have to look at what's going on with repos, with high yield bonds, to look whether a temporary liquidity crisis is temporary because it's just liquidity or it's a deeper issue like solvency. But you're not going to make any moves on that. You're not going to make any moves on that. You're going to wait for your indicators to hit, right? Watch out. And then you have the mother of all bear markets.

40:37But if it's just a liquidity issue and the Fed does not screw up, then the liquidity issue is going to work out. It's not going to be a big issue. But you're not... I keep an eye on both things, earnings revisions and liquidity. But let me ask you, can I ask you something? Can you hear me? All right, so I can hear you now. So just go back and circle back. the issue with regard to, you mentioned, well, earnings revisions and you mentioned Civil War and all these things, but yet you're, I don't think, tell me if I'm wrong, I don't think you're gonna make any changes until your timing indicators tell you to do so, right?

41:18Yeah, right. So all these things are good talking points and concern factors, red flags, maybe even, or even cautionary warning flags to get ready for something potentially, right? Because that's what history has shown you. but the fact is you stay disciplined. Very disciplined. You know why? Yeah, well, tell me why. I know why. Yeah, because my indicators are smarter than I. So they discount what's going to happen. They are technical indicators. So if it's going down, don't argue. Don't argue with that. It's kind of very simple. Isn't that when you like step back and look at a chart and don't know what's going on and you say, okay, well, what's going to happen?

41:58Well, it's obviously going down. You know what I mean? It's like, it's obviously went down. And you think about this and you're like, well, why did I stay long? Or why did I go short? Or whatever, right? Why did I do what I did? Why was I in? Why was I out? And the thing is, it's like those indicators, like some of them, it's like, well, like I look at the moving average convergence divergence indicator, which seems to be one of those that newbie investors love to use on a technical analysis platform or the RSI, for example. But the moving average convergence divergence indicator basically is just another representation of the same thing you're seeing on price action, right?

42:33Exactly. It's a derivative. Exactly. So it's like, oh, look, it's going down. It's like, but so is the stock. So, or it's going up. Well, so is it. It's going up. Look at that. It's crossing. Well, that's because it's moving up fast. You know, it's kind of funny. It's like, well, didn't you see that in the first chart to begin with? And something to consider. I'm just saying that these things, what you have is a sophisticated protocol based on a lot of different conditions that if they meet, and if not one, but not two, three, go in the right direction is where you're fully invested, right? Exactly.

43:11That's the point. Not all trend following is the same. So if you are going to time the market with moving average, you're going to fail. Maybe you will reduce a little bit drawdowns, maybe, but you will not outperform. This is very clear. Now, you need, for instance, you know, I use the DAO theory with three indexes. So it means we need confirmation. Confirmation really works, not only within the realm of the DAO theory. Take even a moving average, and if you require confirmation from another index, you will see that you get rid of lots of noise, whipsos. So, of course, we use confirmation, the concept of secondary reaction, which I think I explained in another interview.

43:51So the DAO theory is a much more sophisticated, does not mean complicated. Watch out. but it's a more sophisticated method to appraise trends. So it's not as simple as say, hey, look, rate of change or MACD or whatever. No, it's a little bit more sophisticated, not complicated, but of course it entails confirmation, not any pivot on the chart is a relevant pivot because we use the concept of secondary reaction, which means that some pivots on the chart are technically irrelevant. So a breakout does not carry any significance. So, of course, it's more sophisticated, but it's based on some principles, principle of confirmation that you need some time for a secondary reaction to unfold, that you need also some extent.

44:41It's not the same a 2 % drop in 10 days that a 7 % drop in 10 days. So the latter has more significance. and of course then when you have the right market timing tools then you can time the market and this is why i trust more furthermore when you use three indexes as i do this is very similar to breadth because to some extent when we say i look for confirmation okay what's confirmation confirmation means that another index which is made of several stocks of many stocks at the same time is confirming means that there is good breadth definitely because if the smp makes a higher high, but the Dow industrials does not, it means that the 30 stocks in the Dow industrials are having poor breath, because otherwise the Dow industrials would be confirming.

45:30So to some extent, some of the tools I use is a surrogate of also breath, which is very much in vogue nowadays. So, you know, and it's based on some principles, blight time indicator, okay, It's based on trends as well, but it also incorporates margin debt because there is a direct relationship between the trend of margin debt and the trend of the stock market. Well, but that's the same thing we just talked about. More margin debt means more buying, which means the stocks go up. But here's the thing. Let's talk about that because I think this is an important item. As of September 2025, the FINRA margin debt was a record high of$1.13 trillion.

46:13A record high. The problem with margin is not just simply taking money and putting it to the market because it's money on top of money, right? Yep. So we also doubled, almost doubled, the margin debt levels since December 2022. Any concerns about this? I mean, I know it's good that we have margin debt. It's expansive. What does it indicate? In the case, either one, invest a confidence or two, invest a stupidity. Look at it either way you want, right? But the problem is the potential. I haven't seen it yet. But the potential for adding that to like the same-day margin, same-day options or single-day options, zero-day options, and all the leverage.

46:55We're not even talking about the margin that's been put into leverage products. That's a leverage on leverage. Any concern about that? look margin is a double-edged sword so um first yeah it's a at very high levels but if you adjust the total level of margin debt by market cap you will see that it's not so horrible because the absolute value is very high it's very true that it's it has rallied a lot in the last years But if you adjust for market cap, well, it's high, but it's not as high. Secondly, since I am a trend follower, something that looks ridiculous, expensive or ridiculous, overblown, like now margin, can continue to go higher.

47:47So this is why I also measure the trend of margin debt, but not based on moving averages because they don't work. I measure the trend based on the authority patterns, which is different. In other words, now we can say the margin debt is very high. True. It's not at its highest if you divide per market cap. But who knows whether it's going to continue going higher. I have no idea. So we write trends. So it would be very tricky to call a top in the stock market because margin debt looks expensive. Furthermore, there is another study I performed that says that normally margin debt peaks some five, six months in advance of the stock market.

48:37So in other words, now we had in September, latest data, very high figures of margin debt. Record, just to be clear, record high. Yeah, record high. And adjust, yes, record high. So let's imagine that now drops in October and in November. Okay. So if we see a peak on the chart of margin debt, it normally tends to peak five, six months before the stock market. So then it would be a yellow light, not a red light, but a yellow light. Look, the stock margin debt has peaked. But we are trend followers. It's high, maybe in October, it will decline a little bit. I expect it to decline because of that liquidity hiccup.

49:25But maybe in November, it makes a higher high. So we are trend followers. So until I get really solid evidence that the trend of margin debt has changed, I consider it bullish for the stock market. And when will you consider that the trend of margin debt is bearish? I use TAL 30 patterns, so not a moving average. So I have to hit higher high, lower low. It's a bit too long to explain here. But once I'm convinced that the trend has changed, not just a minor pullback, then this is bearish for the stock market. But we are not in this situation yet. All right. I'll buy that. I'll buy that. I mean, but it does seem to me that things are getting a little bit frothy.

50:12And like you said, I think we both agree that it's okay for market. In fact, it sometimes gives you opportunities to, you know, if markets do pull back. And that is a normal part of the process. I just don't want to make it too normalized that people are like, oh, no big deal. You know, we start talking about things like what they talk about with crypto. Like it's the crypto winter. That's fine. You know, we have those every once in a while, these 20, 30 % drawdowns. Like, really? Seriously? Is that what we're going to talk about now? Crazy stuff. Manuel Bligh, tell us how to get the information.

50:40We're going to, of course, have all the information on the show notes for episode 946 on the disciplinedinvestor.com where you can find the stuff. But you tell me where people can go to get your newsletter. Well, you can go to the the dowtheory.com. This is our website. The dowtheory.com. The, with the article, with the article, the dowtheory.com. Everything together, the dowtheory.com. Okay. And for more, there's also lots of free stuff. So every - We like free stuff. Yeah. We love free stuff. Furthermore, there is one very good one on why valuations look high, but they are not as high, which is a little bit academical, but it links capital per capita, so per head, and also liquidity.

51:27And both have an influence of market valuations. The richer a country becomes, and this is an insight I owe to Ludwig von Mises, the Austrians. So the higher, there's a natural rate of interest, and the higher the capital per head, per capita, the lower the natural rate of interest. This makes sense. So if capital is plentiful, you will lend it at a lower interest rate than when capital is not plentiful. It makes sense. Yeah. So the marginal utility of capital. So, in other words, the richer a country becomes, the lower the discount rate, the theoretical interest rate will be. This is not the Fed one.

52:11And this means the higher the price to earnings ratio will tend to go. And this is why many value measures don't seem to work anymore. There is a second variable. Liquidity also affects valuations. There's a direct relationship. So when you put the two of them together, then you may reach the conclusion that, okay, it's a little bit frothy, but what looks expensive today, maybe it's not so expensive. I don't say it's cheap. The market is not a bargain now. But we have to be very careful with valuations. And furthermore, since our timing, I'm a market timer, my timing horizon is one year. So the average duration of my trades is one year.

52:54So even high valuations, whatever is high, because it's not so clear, don't have any value in forecasting the next year. It has some value in forecasting the next five to 10 years. But for market timers, it's really not so important. I'm not saying that the market - No, no, I get it. It's a different - Listen, it's a different way of doing things. That's the bottom line. Market timing, using the disciplines versus a valuation metric, It's black and white. It's different. I get it. I get it. I totally get it. I totally get it. We're going to wrap it up there. Hopefully, the next time we get together, we'll be looking back at your young bull market call from the beginning of November, 2025.

53:39We'll see how that plays out. Thanks for joining me. I appreciate it. Thank you, Andrew. Thank you for having me on your show. Always a pleasure. Thanks, buddy. See you. And another great show in the bag. We have some great guests coming up. Look, next week, Ross Gerber. We have Tim Knight coming up, who somehow we always time it where there's all of a sudden a big rollover in the markets. Then we have Howard Silverblack coming up the following week into the end of November. He is the keeper of the information for S &P Dow Jones Global Indices. And I'm looking forward to having him. It's been a while since he's been on, but he knows all the details about every single thing, things that we talked about today, about PE ratios, but also digging down deep into the actual numbers.

54:18So that's a pretty exciting interview and some discussion that we're going to have. Make sure that you go over to either Amazon Music or Spotify or Apple Podcasts or wherever you get your podcast from. And you subscribe and you make sure to leave a review. That is really appreciated. Any information you want to know about what we do, go over to the episode notes or the show page or the website, thedisciplinedinvestor.com. Thanks for joining me this week and every week. And I'll see you again really soon.

54:51This podcast is intended for informational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principal and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowitz and Company Inc., an investment advisor registered with the U.S. Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. Advisory services are only offered to a client or prospective clients where Horowitz and Company is properly registered or is excluded from registration requirements.

55:29Any mention of third-party companies, products, or services is provided for informational purposes only and does not constitute an endorsement. Hypothetical scenarios or forward-looking statements are for illustrated purposes and should not be viewed as guarantees. Content is intended for U.S. residents only and may not be applicable in other jurisdictions. Listeners should consult a qualified financial advisor before making any investment decisions. Please visit our website for additional information, disclosures, as well as a copy of our form CRS. Advertisements are not related to the host or affiliates and are not considered recommendations by the host of the show or any affiliates of Horowitz.

56:20We'll be right back.