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Real Time Insight

Back in June, when the S&P was slipping below 1600 in a scary 7% correction, I said we would see "1800 before 1400." Here we are.

According to the Leuthold Group in a research note published earlier this month, "Small Caps are selling at a 16% valuation premium relative to Large Caps, using non-normalized trailing operating earnings. Using estimated operating earnings, Small Caps are selling at a higher valuation premium of 23%."

Going  back to 1983, they say the median premium is only 2%. And while a 16% premium sounds rich (and historically, it is), the differential hit over 25% in early 2012.

Is there any justification for these valuation extremes?

I think there are several:

1) This bull market may be in its late innings, but they are the most powerful ones, capable of shattering all kinds of records, beliefs, and underexposed investors.

2) The economy is building momentum and capable of hitting 3% GDP next year. Especially with the Fed on its side.

3) Earnings on are on pace for new records above $110 for the S&P 500.

4) While headline strategists like Fink of BlackRock say the market is fully valued, most of the PMs whose 13Fs I looked at this weekend are still happy to hold large positions in their favorite stocks.

5) The final stage, or inning, of this bull will be something euphoric, with crazy headlines and lots of sidelined money finally capitulating, where favorite stocks are going up 5% in a day, after having already gone up 50-100% for the year. That's when smarter money will be selling.

All of these together create a virtuous spiral of momentum for stocks. Yes, multiple expansion is and will continue to play an important role. But that is not a criticism of strong bull markets. It is the definition of them.

And my list leads me to a new prediction of S&P "1900 before 1500." Obviously I am allowing for a serious 10% correction at any time, maybe next spring. And some good 'ole sideways action for a few months, after we hit 1850, might be in order too.

But I am not allowing for a market top followed by a 20% correction and bear market. Not yet.

Bottom line: the bull market top is not even close.

I invite you to add to my core list, or tear parts of it down if it suits you.

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