The Dow made a new record high every day this week, except Friday. The S&P 500 Index came within a hair’s breath of its historical high as well. Most world indexes are doing the same thing. The consensus is that the markets are going higher–Uh oh.
I guess I should feel vindicated for remaining bullish over the last year or so in the face of all those “what will go wrong” scenarios. However, when just about everyone is bullish I start to get concerned. It’s the contrarian in me.
There are a handful of readers I use as a contrary indicator. You know the type. When the markets are at a bottom, they want to go to cash. At market tops they usually call up asking if they are too conservative no matter how much they are making. I received several e-mailss this week from those kind of readers who were asking about getting more aggressive. Uh, oh.
When I compare the U.S. equity market with its counterparts in thirty other nations, I find that our market is the most overbought of any of them, although Japan comes in a close second. Uh, oh.
But markets can stay overbought for a long time, so I wouldn’t go out and try to short stocks right here, nor would I take profits.
So far, every dip in our markets has been met with renewed buying. The most popular explanation for this seemingly insatiable demand for stocks is that U.S. Treasury bond investors, tired of receiving record low interest payments from their holdings, are finally selling their positions and are seeking greater returns by investing in stocks. It is called “The Great Rotation,” but the evidence is more hearsay than fact.
The financial media is doing their part to stoke the buying frenzy. They are having a field day citing financial statistics of this record or that. The Dow, for example, has been up ten days in a row. That has only happened four times since WWII. An interesting statistic, but worthless when it comes to your portfolio or what happens next.
For those who feel compelled to put more money in the markets at this late date, do so with some financial acumen. Don’t buy on the up days or buy everything at once. Average in and try to keep your emotions out of it. Remember, investors’ greatest enemies are fear and greed.
Another suggestion would be to look for the laggards using the “rising tide lifts all boats” theory. If you truly believe that the global markets are going to continue to rise (with no breaks) in the foreseeable future than buy those stocks, sectors and country indexes that have lagged the U.S. market.
And for those who have stayed the course and are fully invested, remain so. However, I suspect that as March advances the rate of gains will slow. Once the S&P 500 Index breaks out to new highs, the markets will become a battleground of those buying the dips versus those wanting to take profits. That is not a game that most of us will be willing to play. I know that I would rather sit with what I have and watch the battle play out. Either way, I don’t see much downside risk for long term investors. Overall, I am still looking for double digit gains in the markets this year.