This week the game changed. The stock market indexes actually had a down week. Most investors are blaming it on the Fed, but not me.
On Wednesday, the notes from the Fed’s last FOMC (Federal Open Market Committee) meeting were released at the same time Ben Bernanke, its chairman, was speaking on the Hill. What riled the market was a discussion by some of the committee members concerning exactly when the Fed should reign in some of the $85 billion of treasury bonds it is buying every month.
Some FOMC members expressed an opinion that the Fed could possibly taper off some of its purchases as early as June if the economy appeared to be gaining momentum. There were no definitive conclusions, but I guess the markets were appalled that Fed officials would even discuss such a thing. Some investors, flush with hefty gains from this remarkable seven month run, headed for the exits despite the fact that when Ben Bernanke was asked about this FOMC discussion the same day, he assured the investing world that it was far too soon to consider a reduction in stimulus.
The decline in our market triggered a sell-off in Asia. The Japanese Nikkei Index fell 7% overnight, which added to the suddenly fearful and somber mood. Tokyo’s decline should be put into perspective, however. That market gained more than 50% in the past six months, so a 7% decline is not that spectacular given the gains. But it only took a few hours before the media hopped on the band wagon and hibernating perma-bears came roaring out of their caves.
Frankly, I could care less what reason the markets use as an excuse to take profits. We have had a wonderful rally and although it is far from over, a seventh inning stretch is definitely in order. It is time for all of us to stand up and stretch our back, arms and legs, walk around, maybe even do something different like taking some time off and enjoy the summer. Recently there have been some tell-tale signs that this market needs a break.
The level of optimism among the investment crowd (a contrary indicator) has reached a level that has usually signaled a market pullback. That indicator also happens to coincide with the seasonality factor. Markets do poorly more often than not during the summer months.
A speculative flavor has developed as well. Over the past few weeks heavy borrowing in investment accounts, called margin buying, has been on the uptick. There has also been a surge of buying in penny shares and a spectacular increase in the prices of heavily shorted stocks. You may have also noticed the buying frenzy, similar to past bull markets, in recent initial public offerings (IPOs).
All of which simply indicates that the markets are in need of a pause, nothing too serious, simply a pullback that allows those who have been left behind to jump aboard. For those of you who have been considering turning up the dial in your investments, I would use any kind of dip in the next few weeks as an opportunity to adjust or fine tune your portfolios. Stay invested.