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.