Weekend April 12 2014
Signs of an Impending Stock Market Top
Many readers no doubt joined the rush to equities this past year and its stunning 25%+ rally across various indexes. The idea of buy and hold has, well, taken hold again. Our purpose today is to warn the necessity of getting defensive, not offensive, with your hard earned money.
Markets exhibit many cycles. One is generational, all the better to invalidate one generations’ advice to the next. For example, 1982/84 to March 2000 produced a stunning stock market rally. The Dow Industrials soared from sub 1,000 to 11,000, one for the record books indeed. The idea that one should ‘buy and hold’ investments took hold. Never mind the 1987 crash of 20%, the market came back months later. And hey, look at John Templeton and Warren Buffet. They did not make their fortunes day trading. They are buy and hold investors. And even Warren, notes that BRK (his firm) has fallen 50% three times in its history. This ignores the difference between the average investor and Warren. The average investor usually buys in late in the cycle. And as prices fall below cost, it is hard to be reassured one’s nest egg will recover. And what many overlook, is that Buffet does not just buy a few shares like you and I, indeed, he buys the entire company. When the firm records net profit, indeed at 50% + ownership, it is HIS profit. Finally the real money is made by investingcash at the bottom of a cycle. More important, this allows one to be emotionally neutral, which the rest of the buy and hold crowd never is, as stocks are thrown overboard in final panic selling (think March, 2009).
The long bull cycle beginning August, 1982 ended its eighteen-year run March, 2000. We are now in an eighteen-year cycle of stagnation. Stock prices rise and fall with many investors no better off today than they were in March 2000. Based on past such cycles (1930-1948 for example) we can expect at least three down moves. Two such moves have already occurred. That would be 2000-2003 and 2007 to 2009. In similar fashion two giant rallies (think 1932-1937) have occurred Those rallies were from 2003 to 2007 and 2009 to now. A third decline likely lies directly ahead. By that I do not mean the markets fall straight down from here, no the Bear is much more clever than that.
Here are some clues that it is looking much like 2000 and 207 again.
|
Indicator |
Price Drop from top 2014 |
Percent Drop |
|
Amazon |
410-320 |
21% |
|
Price Line |
1375-1175 |
14% |
|
|
72-59 |
18% |
|
Tesla |
260-204 |
21% |
Worse, the NASD One Hundred or NDX has now broken its two-year up trend to the downside. Not surprisingly the market is growing defensive. Indeed, I saw a headline this week proclaiming it was time to go back to dividend paying large caps. In Wall Street jargon, bear markets never happen, it is always time to buy and hold. Wall Street’s job is to distribute product to the public which generates fees and commissions. This is not the same as looking out for you, the client.
Seasonally it is true that money is made buying the November lows and selling at the May highs. So goes the saying, After May, Go Away. This year is shaping up to make that case once again. It is likely the big caps (large capitalization stocks, think IBM) in the Dow Industrials and S & P will make some sort of high again in May. Some indexes will rebound making lower highs than previously occurred this year.
Other similarities to 2008 are evident. The price of crude oil has rebounded from 98 to 104. Recall that the last market high occurring in 2008 was a soaring oil price, from 100 to 145 in about four months. That was the result of the FED’s easy money policy which led to a lot more speculation than job creation. Here we go again. This is particularly troublesome in that the run up led to a collapse from 145 to 35 by Christmas. I am not predicting that, just reminding readers of then and now.
Bond prices are already moving up as the smart money shifts out of stocks. The bottom line is that it is time to be cautious and defensive.
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