Don’t Mistake a Bull Market for Brains
Most investors do well in a bull market. But don’t mistake a bull market for brains.
Linda McDonough, chief investment strategist of Profit Catalyst Alert, puts it this way: “One thing is for sure, as I noted in my 2017 forecast in Investing Daily’s Personal Finance, I expect the stock market to be rocky this year.”
Below, I examine the latest dangers of today’s market and explain how to protect your portfolio.
Super investor Warren Buffett once said: “It’s only when the tide goes out that you learn who has been swimming naked.” Make sure you’re adequately clothed.
The yakkers on CNBC are hyperventilating about continual new highs in the broader markets. And that’s never a good sign. Look behind the splashy headlines that tout new highs for the major indices and you’ll see a disturbing trend: Last week, more NYSE stocks hit new 52-week lows than new 52-week highs.
As of this writing, more than one-third of stocks are already below their 200-day moving averages. It’s a red flag when a minority of stocks is propelling overall market performance.
Then, of course, there are valuations. The total U.S. stock market is now valued at more than 150% of the country’s annual gross domestic product. This value is far higher than historic norms and roughly the same during the market bubble of 2000.
Bullish sentiment among investment advisors has skyrocketed to the highest level in three decades and consumer confidence is at a 16-year high. These levels of giddy optimism are akin to the highs reached during the 1987 market peak.
Meanwhile, the Federal Reserve reports that the so-called “q” factor, which compares stock market values with the prices of actual corporate assets, is 1.0. The historical average is about 0.65. The forward 12-month price-to-earnings ratio for the S&P 500 is 17.9, compared to the 10-year average of 14.4.
Many traders are taking bullish sentiment as evidence that consumer spending and economic growth will continue in 2017. Sure, consumer confidence remains high, but that’s a lagging indicator. Economic recoveries last about eight years on average; the current expansion is approaching its ninth year.
All of these exuberant readings are contrary indicators that historically have marked peaks. The Federal Reserve’s policy of keeping interest rates at rock bottom has clearly fueled this bull market, but that’s changing.
The Federal Reserve is meeting this Tuesday and Wednesday and will probably emerge from its confab with the announcement of an interest rate hike. Rising rates often trigger belated corrections.
As the analysts at Investing Daily pointed out on March 13:
“Fears of higher interest rates and more policy uncertainty from Washington DC gave traders the excuse they needed to sell stocks over the last two weeks.
As bad as that may have felt, since its record close on March 1, 2017, the Standard & Poor’s 500 Large Cap index of stocks had only dropped 1% by March. But things may change rapidly; the current technical picture is one of a market that is at a crucial decision point.”
A muted celebration…
The bull market turned eight last Thursday, but the birthday celebration was muted. As the stock market bubble continues to inflate, investors are bracing themselves for the inevitable day of reckoning.
Will the long-awaited correction come this year or can the market dodge the inevitable until 2018… or even 2019? Capital appreciation is only part of your goal; capital preservation is important, too. As we navigate an unpredictable investment climate, your watchword should be caution.
If you haven’t adjusted your portfolio accordingly, you’d better get on the stick. Investors typically don’t recognize irrational exuberance when they’re in the middle of it.
Rotate into non-cyclical, more stable companies that provide services that are consistently used regardless of market or economic conditions. Utility stocks are a great example. Spread your portfolio among large-cap, mid-cap, small-cap, growth and dividend stocks. One often ignored move is to invest in mid-caps, which provide greater growth potential than large-caps but less risk than small-caps.
There’s a fundamental rule underlying these tips: Don’t put all your eggs in one basket. Admittedly, that phrase has become a cliche, but it’s more appropriate than ever.
And above all, reduce your exposure to growth stocks.
Jim Pearce, chief investment strategist of Personal Finance, recommends these portfolio allocations right now: 35% in stocks and the remaining 65% in cash, bonds, and inflation hedges. You should also invest at least 5%-10% of that 65% in the classic crisis hedge of gold.
The dangers of standing still…
As I’ve just explained, you could be facing severe disappointment if you simply hang onto the same old blue chips, hoping they’ll methodically boost your wealth no matter what happens in the broader market.
Today’s dicey investment conditions call for proactive measures.
That’s why Jim Pearce and his investment “A-Team” have been testing a system called Rapid Profits Matrix. What they found is astounding.
Rapid Profits Matrix outperforms buy and hold up to 4.9 times in direct competition. And yet, this trading system generates outsized returns without risky day trading or complex options. If there ever was a time for this trading system, it’s now.