Trying to call a market top these days is like listening to a Neocon predict strategic choices, the outcome will either anger you or cause you to shake your head in disbelief. I’ve been relatively quiet the past few months because there has been little new to talk about. We have a very uncommon stock market that ever so slowly grinds higher making fools of those who try to call market tops. There are times when investors must simply do nothing. Rather than stare are your holdings, go for a walk in the sunshine, watch the World Cup – trading slows to glacial speed when the games are on, except for the commercials. If you’re like Paul T. Jones who makes his living off volatility you can fantasize about being on Dancing With The Stars.
The old adage “You can be right, or you can make money” has never been more apparent. This market is hated by many, these are the folks who’ve been negative on stocks for quite a while who insist that doom or at least a market correction is near. The problem is that in the meantime they’ve lost so much ground sitting in cash earning 0% that they likely could endure a decent market correction in the future and still have more profits than had they stayed in cash.
On Saturday, my wife and I were having brunch at a local Boulder spot called Tangerine where I happened to overhear a conversation between a couple the next table over. A woman was fretting over when to sell her stocks to avoid a market downturn. Most amateur investors view selling their stocks and going to cash or alternatives as a single dimensional when in fact it isn’t. What happens when a person decides to sell and a few weeks later realizes they made the wrong choice? Taxes aside this is an expensive mistake, do they become entrenched in their belief that “the market is so relentless that its bound to top out, so it was a good decision”? At what point do they give in and realized the mistake, 5% higher, 10% higher or more?
As a basic rule of thumb I wouldn’t be overly concerned about stocks until the yields on Treasury Bills and Bonds become inverted (the yield on the 20-year bond is lower than the yield on a six month T-Bill). Sure, we’re eventually going to have a market correction but the timing is impossible to predict with accuracy at this point.
If you find comfort with an academic study of this issue I’d suggest: “Predicting the Bear Stock Market: Macroeconomic variables as leading indicators” Chen, 2009.
Or, visit the Cleveland Fed: http://www.clevelandfed.org/research/data/yield_curve/
Brad Pappas