Fox26 - Stock Market Rally And Buying Tops
Spent a few minutes with my friend Mick Iscovitz on Fox26 discussing the recent stock market rally and a recent article on the return of the American "Wealth" boom. I discussed this very thing in our most recent missive, which I mention in this interview, where I stated that:
As I have stated many times recently there is a huge disconnect going on between the underlying dynamics of the actual market and the media and analyst hype.
This past week the Dow and the S&P 500 crossed important psychological barriers of 14000 and 1500 respectively. Immediately the headlines read that “And We’re Back! Dow 14000 Fuels A New Wealth Boom.” The article stated that “The stock market has gone from wealth destroyer to the nation's largest manufacturer of new millionaires and billionaires. The market moves are creating a new virtuous cycle of confidence for the wealthy.”
The reality, of course, is that this is hardly the case. While there may indeed be more millionaires and billionaires now than there were in 2007 it has little to do with the actual recovery of the stock market. Wealth, at the upper end of the income spectrum, is due to the expansion of profits relative to employment which is at the highest level in history. The continued increase in productivity, through technological advances, suppresses wages for 80% of the population while increasing executive/business owner compensation.
For the rest of the country it is a different matter and getting back to Dow 14000 is a hollow victory at best. It is a reminder to most that they are really no better off today, or closer to retirement, than they were 13 years ago. Of course, 13 years ago, like today, the markets were hitting highs and the media was bleating that there were only “blue skies” ahead. It was the “Danger Zone.”
However, in the meantime, this is how to approach the current market.
- Do not add to equity exposure at this time no matter how emotionally conflicted you become. Emotions lead to bad investment decisions - always.
- Sell some, not all, of positions that are speculative in nature and have a lot of volatility. When the correction comes these will be hit the hardest.
- Increasing stock markets suppress bond prices. Therefore, rotate some money into bonds which will benefit from a stock market correction – “Buy where the money ain’t goin’.”
- Hoard cash – you can’t be a buyer when things get “cheap” when you don’t have any cash to buy with.
- Rotate from very aggressive equity exposure to more defensive positions that have an income stream. (ie utilities, staples, and healthcare) However, these positions WILL lose money when the market corrects – just not as much.
- Beware of high-dividend plays particularly REITS and MLP’s. The majority of these positions are GROSSLY overbought and overvalued and a correction of magnitude will lead to larger losses than you can currently comprehend.
- Fundamental valuations HAVE NO bearing on a stock market correction. No matter how fundamentally strong you think your investments are they will generally correct as much, or more, than the marketFundamental value is only effective for eliminating bankruptcy risk. In a market environment driven primarily by programmed trading it is only PRICE ANALYSIS that matters.
- Did I mention hoarding cash?
- Pay attention to the trend. The trend is currently positive and we want to mindful of that. It will require a VERY substantial price correction at this point before a SELL signal is issued. This is why profit taking, and keeping new savings in cash, is the best way to stay invested but reduce overall portfolio risk.
- Just because you take profits, or sell a position today, DOES NOT mean that you can’t buy it back after it corrects. That is just a good portfolio management practice. There IS NO successful investor – ever in history – that only “bought and held.”