Can you believe that six months of 2014 has passed? Television journalists have been busy keeping us informed of new all time’s highs and have hosted a continual parade of the bears predicating the big correction. The problem is that when the reality is good; the only way to get our attention is to say something different even if there is very little proven analysis to back up their doomy predictions.
I use the following market conditions to remain levelheaded among all the noise. The first and the most important is valuation. Valuation is very tough to gauge in this environment. In the 1990s when stocks gave us about the same returns as they have this year you could buy treasuries to offset, but that does not exist today. Stocks are priced to have low returns but treasuries are priced to have no returns.
At the present there are various P/E models that attempt to give us what the valuation of the markets currently exhibit. My caveat with valuation is that holding a lot of cash based upon valuations alone can dramatically affect your performance. This is an example of market timing which I have yet to find any proven process for success.
The subject of monetary conditions for predicting the market is very difficult when the effective rates are zero. Historically, as rates go down stocks go up but it is hard to find in the last thirty years conditions where rates have stayed this low for this long.
The sentiment of individual investor is extremely perplexing. I have never seen a very health bull market so underappreciated as this one. However, sentiment is improving which suggest that the point of maximum optimism for this bull market occurred in January of this year and that correction risk is elevated. The point of maximum optimism doesn’t mean a bear market is looming, but it suggests that we are in the later stages of the bull market.
This bull market isn’t over, but the risk of notable corrections elevated. This does not mean we are going to crash but locking is some profits on extended positions is prudent and remain patient for the next opportunity. Since of process of rebalancing is a major point of our models we practice the profit taking is automatic.
We are introducing a new program to learn more about the “financial behaviors” that affect our investment decisions and attitudes. We are sending a short quiz that would identify your personality traits and beliefs and create a report showing how they affect your approach to finances.
Please contact us to receive your Financial DNA Natural Behavior Discover Process questionnaires – one for each of you – to assess your “natural behavior.” Completing this questionnaire is completely optional, but I hope you will each answer the questions and return them to me for analysis. The Financial DNA system will take your answers and compile reports showing your individual results and compare your results as a couple.
The questionnaire is meant to be completed fairly quickly, within 15 to 30 minutes, so do not worry too long over any one question! There is no correct answer or passing grade.
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I am asked this question several times a week. Since I adjust to the market and do not predict it, let me give you a possible scenario. Volatility has returned, the S&P 500 has fallen more than 4% and the doomsayers and short sellers are expounding that the bubble has burst.
Now that we are back to within 1% of its all-time high their calls have been somewhat muted. I have no intention of trying to market time but I believe this market has a long way to run before the bulls stop making money.
There is no doubt that this bull market is getting mature and I don’t see a retirement plan for the bull forthcoming. The bull is now some 63 months old. That is longer than nine of the 15 bull markets since 1871.
However, it still has five more months to go until it is average in terms of length-and 41 months before it reaches the post-World War II average. Bull markets have been getting longer since the end of the War-a lot longer. Starting with the beginning in1949, bull markets have lasted an average of 104 months or nearly 9 years. The current 5 years doesn’t seem so old, does it? There has been seven bull markets (including this one) since 1949 and the current one only places seventh in terms of length.
From the low in 2009 at 66.79, to the all-time high of 1897.28, the S&P has risen 185%. That is above the 163% average since 1871. However, the modern bull (since the end of WWII) has averaged 259% gains.
Three bull markets gained less than 100% while the other three were up 391%,414% and 516%, respectfully. Could the fact that the current one broke through the 100% barrier mean that it’s headed significantly higher?
This is just an observation but if the market simply performed according to ache average modern day bull market, it would last another 3 ½ years and rise 74%.
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The old adage of selling in May has started its mantra in the media. Unfortunately, it is an outdated theory which has not come to fruition over the past few years. Market timing does not work and various academic studies have concluded this finding. With global investing, diversification, and rebalancing on a discipline basis you will have less chance of underperforming and missing opportunities.
I have been examining various valuation measures that are used in measuring markets. There is the Fed Model, Tobin’s Q, Spiller’s CAPE, Hussmann’s P/E and VLAP. The problem with these is that they can tell you how far the market has moved but not really if it is overvalued and when you should invest.
There is a debate going on right now on how overvalued we are based on the above mention measurements. The problem is that the signals are mixed resulting in a useless indicator. Fed Model is very attractive for stocks; however the others result in different degrees of over valuation.
Since my job is to adjust not predict markets, speculation on which one is right is a losers game. The monetary is very strong right now with interest rates at historical lows. This should give us some comfort from the “sell in May and go away” theory. The psychologypart of the market is too complacent with the individual investor staying out; waiting for the next pullback to board the train.
Rebalancing and some spring cleaning of portfolios is what we are doing. This is not timing or getting out. Just proper portfolio risk management to ADJUST to the sector rotation that is going on by the institutional investor community. To simplify “buy low, sell high” it always worked for me.