Okay, so I won’t be the first to tell you the market is getting a bit top heavy, but it is getting a bit top heavy. Not that I mind, mind you, but there is a reality here that must be recognized – the market is getting ahead of itself. Didn’t I just say those words yesterday? Well, I did and they are true.
Actually, the problem is not so much the market getting ahead of itself. It will do that from time to time and then rebalance, tweak itself so to speak. No, the problem starting to develop is the bulls now are on a mission to take the market higher, and in their stampede, they are creating a perception bubble.
- Valuations have reached crazy levels thanks to this week’s move to new highs… levels frothy enough to become an impasse, particularly in light of the Federal Reserve’s recently-lowered economic growth outlook.
The higher the market rises now without a rebalancing (small selloffs here and there), the more likely it is that it will drop hard when it does rebalance. At that point, if professional investors perceive they are not getting good “value” when they buy, they will stop buying to wait for a better “in.” As they wait, the professional sellers will short the market, sell and then sell some more, which will panic the retail investor causing more selling, and that will keep the buyers waiting for that “value” opening.
Of course, the technical floors then come into play, and if they are breached, the selling continues until market valuations are low enough that buying is right again. At that point, the fundamentals kick back in, and if they are good (and they likely will be), buyers push the market back up, creating a short squeeze here and there along the way, which adds impetus to the upward trend, which then brings us back to where we were.
I am not saying for sure this will happen, but it becomes more likely if the market goes up day after day without a down day or two here and there and it is likely the market will keep going up more than down, even as it gets ahead of itself, because of the economic fundamentals.
- The number of Americans filing new claims for jobless benefits fell last week and factory activity in the mid-Atlantic region accelerated in June, more evidence the economy was strengthening after a disastrous first quarter.
Here is the other aspect to the perception bubble, which is the opposite of “waiting for the right in.” If professional and retail investors perceive the train is leaving the station and they are not fully on board, they will chase the train until they get on board, which drives the market irrationally higher. “Irrational exuberance” can go on for some time, indeed.
- You really need to make sure you know what kind of investor you are in this environment, and you really need to know the real reasons you’re interested or not interested in a particular stock right now.
My point here is that it is time to review your strategic approach to the market. Are you in for the long term or the short term, or both? Long term, no worries. Strategically buy and reallocate over time depending on where the money is flowing. Short term, well, that is a different, multi-faceted game.
Do you day trade, swing trade, position trade, or trade on the fly? Do you trade small-caps, large-caps, mid-caps, or penny stocks? Do you short sell, play options, trade commodities, or take on futures? Whatever you like to do, you need to be prepared for a period of volatility toward the downside this summer, if the market continues up, up, and away.
Now, on the other hand, the VIX is down, way down, so at least for the next thirty days, the market is pointing to calm. And we do have money flowing into equity funds, and we do have lots of sideline cash waiting for an in, and we do have the US, European, and Chinese economic fundamentals incrementally improving, and we do have the accommodative Fed policies.
All in all, it seems the market could go either way, which is not really helpful I guess. Truth is, I am not a psychic, nor do I pretend to be. I simply take the best information I have and make the best possible guess. David Moenning sums it up nicely in the following sentence.
- If we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move.
Yup, I am a little concerned about the frothy market, but, hey, the information I have suggests an overall positive vibe – the Fed is good, the US economic fundamentals are good, and global economic growth is happening. The one big potential downside catalyst is geopolitics. Iran, Iraq, Syria, Ukraine, Russia, and Asian tensions are stressors, but not so much so they bring the market down, at least not yet, which is another consideration altogether.
Trade in the day; invest in your life …
