 Good day fellow investors! Today we'll discuss the SAP 500. What's very interesting about it it's that it's just going up and it has been going up for the past nine years almost. What's very important for every investor to know is why it's going up, when will the trend inflect and how will that affect the general investment environment. So we'll first see why it's going up, what are the factors and what are the potential influences that will change those factors. As we can see here the SAP 500 index has been going up since March 2009 and is up 259 percent since then. The NASDAQ index has performed even better and is up 387 percent since March 2009. So logical explanation why stocks go up that much would be that fundamentals thus the economy has grown at a similar pace. Unfortunately the economy in the same period has grown only 80 percent. This means that the growth in stocks is in a clear disbalance from fundamentals. Of course that's obvious stocks valuations are at historical highs so it's not a new thing. So what's important is to look at what impacted this imbalance between stock prices and stock fundamentals. The first imbalance is the Fed. The Fed doubled its balance sheet in the last six years and this provided the necessary liquidity for the SAP 500 to go higher. Now what's very important is that the Fed has announced that it wants to trim its balance sheet and significantly increase interest rates. However they will start trimming the balance sheet at very very low monthly installments of 6 billion and up to 40 billion at some point in time. So it will take the Fed more than a decade to trim the balance sheet. However when that starts rolling it could have a negative impact on stock prices so that's something to watch. We are still far away from that so there is still a lot of liquidity and stocks will probably continue to go higher. The second factor influencing stock prices and especially the most important indices are passive index funds because the trend is now to just put your money in passive index funds and forget about it. Passive index funds have destroyed actively managed funds in the last 10 years. We can see how the flow of funds into passive index funds has been always positive since 2009 and very very strong. This means that active funds are forced to sell their positions while passively managed funds that invest in index funds have to buy the stocks that they have been buying for the past nine years because they have to buy according to the market capitalization of a stock. The higher the market capitalization the more a passive fund buys that stock and consequently it's a self-reinforcing cycle that stock goes higher. If we look at the top 10 holdings of the SAP 500 that make 19% of the index so the other 490 stocks in the index make just 80% of the index. This is because the bigger the company the more the fund has to buy and this pushes its way higher. To see how this works I have put here a chart of the top five positions of the SAP 500 in the last five years and we can see how only Apple that had its issues with the iPhone and lower growth has not outperformed the SAP 500. All other four stocks Microsoft, Amazon, Facebook, Johnson and Johnson have outperformed the SAP 500. This is because of their market capitalization and because passive funds have to constantly buy more of the larger companies. Until the trend of investing more in passive funds changes the top holdings of the SAP 500 and the whole SAP 500 will continue to rise. It's all about liquidity now we are completely detached from fundamentals so we have to watch what the Fed is doing and what are investors doing with their money and they are still investing in passive funds so the trend is pretty strong. I wouldn't bet against the SAP 500. The third reason why the SAP 500 will probably continue to grow are buybacks. SAP 500 companies buy back about 140 billion of their own stock per quarter that's more than 500 billion per year. 500 billion is around 2.5% of market capitalization so 2.5% of market capitalization given that the float is not 100% of the market cap really puts extreme pressure on stock prices and as companies can still borrow at low interest rates they will continue to do their buybacks as long as the economy does well and interest rates are low. So again until the Fed really increases interest rates lowers its balance sheet until there is so much liquidity in the environment we have to expect the SAP to continue to grow in the near term and medium term future. Just an example Apple spent 34 billion on buybacks in the last 12 months. That's a huge amount and that completely skews the stock price because when you have such a big investor that's going long the stock no matter the price don't bet against it. So now there are three strong trends that are still persistent that will probably push stocks higher. Buybacks are strong, inflows into passively managed index funds are also very strong and the Fed hasn't really started to trim its balance sheet and hasn't really started to increase interest rates. Thus all the forces that have pushed the SAP until now are still pushing it higher. Plus the market cap is bigger, the float is smaller and there is less stocks and more demand. Thus the SAP 500 could easily go higher. Now the question is should you buy the SAP 500? Well my experience tells me that when you invest in something okay there is the potential that the SAP 500 goes higher but you have to first look at risks, Buffett, Deo, Soros, Claremont, all famous investors they first focus on risks and then on the potential reward. So if we can expect if the situation remains as is 5 to 10 percent from the SAP 500 we have to ask ourselves what will happen when there is a recession and earnings fall from corporations, thus there are no more buybacks. If there is inflation and the Fed is forced to increase interest rates, thus limiting the amount of liquidity in the environment, also limiting the amount of money available to invest in stocks and what will happen when the passive investment trend that everybody follows now turns because those people like to see the trend going up but when it turns down it will be panic and it will be panic selling and there will be nobody buying because corporations won't have the money to do buybacks, interest rates will be higher so we can easily see the SAP 500 for 50, 60, 70 percent in a matter of six months a year when the situation turns. So yes the SAP 500 will probably go higher for the next one year to three, I don't know when will the next recession come but the risks are also huge so be aware of that. Thank you for watching, please subscribe for more insight on the markets, for more research on stocks that are not related to market performance, we look at earnings, we look at quality, we look at fundamentals to make our investments, thus we lower our risks and increase our future returns because in the long term it's all about the quality of the earnings. Leave your comment below, ask questions, share your knowledge and I'll see you in the next video.