The case for Dow 50,000

Jeff Macke

Today marks the official end of the first quarter of 2014 and most traders are happen to see it end. The S&P500 (^GSPC) managed to grind out gains but it took nerves of steel to effectively trade the gyrations. That’s one reason professional trader Tres Knippa takes the emotion out of it by staying long and rolling up his stop-losses.

It’s less that Knippa is “bullish” in the traditional sense of expecting improving fundamentals. He simply thinks the bubble is still in inflation mode.

“Money’s got no where else to go. A lot of people keeping talking about overvaluation. ‘The market has come too far too fast. I’ve missed the opportunity.’ I actually don’t think you’ve missed the opportunity.”

Knippa thinks we’re in the seventh inning of a bubble but maintains that’s where the most explosive moves are often made. The so-called “blow-off top” formation is the frenzied buying before the bottom falls out from long market runs. The most famous end of a bubble of the last generation was the 30% gain in the Nasdaq (^IXIC) from February 1st to the all-time high on March 10th 2000.

Whatever you think of the valuations and today they are nothing compared to what was going on during the waning weeks of the top formation.

Obviously it’s dangerous for investors to be caught long during an investment implosion but Knippa is unabashed about the upside potential. “I don’t think we’re ridiculously overvalued but I think we’re gonna become ridiculously overvalued. I think equities could double or even triple from here.”

His strategy for participating in the upside without getting completely wiped out is to stay long individual stocks and put in stop-loss orders 25% below his positions. The key is rolling those stops higher as the momentum continues.

For long-term investors Knippa’s strategy is absurd on the surface. The implications of what would be left in the wake of a bubble of that magnitude would be horrific. It’s hard to objectively hope such a scenario unfolds but Knippa is clearly devoted to the market he has, not the one he wants.

Knippa thinks stocks are going much, much higher. It’s an openly extreme call but long time traders know better than to question what’s possible.

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