Investors have convinced themselves that the economy is getting better faster than they expected.
Unfortunately, that’s the kind of emotional feedback loop that gets investors and markets in trouble.
Know what the most important evidence these investors cite is right now that proves that the economy is getting better? No, it’s not car sales or survey data from purchasing managers or the new claims for unemployment.
It’s the stock market. Stocks sure wouldn’t be going up with no reason, right? So the fact that they’re going up is proof that the economy is getting better, right.
I don’t see the fundamentals–you know things like growing sales and rising consumer spending–that justify more than another 100 points on the Standard & Poor’s 500 stock index to, say, 1100. Anything move above that is running on vapor and emotion–and the desperate need of money managers who have missed this rally to catch up.
If stocks are up 50% when it comes time in November to report to your clients, do you want to try to explain why you’re 50% in cash, why you’ve lagged the rally, and why you got killed when the market dropped like a stone to the March 2009 lows?
I don’t think we need to immediately rush to the sidelines just yet. Money managers sitting in cash want to buy stocks. They need to buy stocks. They will buy stocks.
But I wouldn’t be loading up the truck here. Enjoy the gains in what you own. But don’t chase this rally at this point. I hope that you bought some of the four stocks that I added to the Jubak’s Picks portfolio in the last couple of weeks. Three of the four are up: Microsoft (MSFT) up 2.2%, Joy Global (JOYG) up 2.3%, and Qualcomm (QCOM) up 5.2% as of the close on August 3. Even the laggard Potash of Saskatchewan (POT) is down just 1% and is on its way, I think, to the black.
I’m not planning on adding anything here unless I see evidence that my take on the economy is wrong and that there really is fundamental improvement underway.
Instead I’m going to spend my time monitoring what I own and looking for signs that it’s getting dangerously over-extended. In other words, right here, while I’m not doing much of anything, my bias is on the sell side.Â
We all know how high stocks can go on emotion, don’t we?
Whoever asked about ENB, its a dividend stock, so we wouldn’t want to sell until the dividend date at the very least which is either yesterday or tomorrow, and payments are dished out until august 14th.
You know, one theory that I’m just not seeing anywhere but I don’t understand why it’s not plausible is that when the market fell in 4Q of 2008, it fell further than fundamentals dictated. This rise you’re seeing in stocks isn’t reflective of great employment, GDP, or other economic metrics as much as it’s the stock marker pulling back towards an equilibrium. Any thoughts?
Ed, I frankly haven’t had a chance to read much of anything while I’ve been getting this site going. Jon is quite right about the market from 1932-1937. But following that run the market went back into a bear (starting in July 1937 and running until Dec 193 7it dropped rouighly a third) and the economy slipped back into the recession. I think Jon’s general point is that rallies can last much longer than we expect–even bear market rallies. But that also doesn’t mean they go to the sky without a correction or two. The 1932 to 1937 rally had 20% or more drops in Feb 1933 and July 1934.
Henry2009,
I certainly agree that markets that are overbought go up and get more overbought. That’s why I said that while I’m not buying anything here, I’m not selling either. The fact that we agree that this market is now trading on emotion and momentum indicates to me that it is riskier–harder to judge–than irt was when stocks were clearly undervalued on their fundamentals.
Because it would create a bookkeeping nightmare in the online portfolios, I don’t buy or sell partial positions.
In the real world, I think selling partial positions now wouid be a sound strategy.
Looks like Jim hit the nail on the head when he said S&P 1000 possible soon , crossing and staying over it in this go is almost impossible
Risk reward donot favour stocks at this time as max upside is 100 for me only 50 and downside risk is 200 to 250 points depending upon what comes to light or happens , biggest worry can be China truth being shown or coming out or people finding it out in large numbers so as to get lots of people worried
Look to lighten up as we move up so that you are atleast 50-60% in cash above 1050
Will get lots of buying oppurtunities lot lower in next 2-3 months …..
Viwi,
I agree with you about the signs of health but I think we need to keep an eye on the global macro events to know where things are going.
1. Strength of the US dollar. If the dollar continues to weaken it helps the US change into much more of an export economy and has a chance to replace the portion of the GDP that is lost by lack of consumption. A weaker dollar will create many opportunities for companies to strategically export supplies. Jim wrote about it from MCD. A weakening dollar will give MCD a huge pop in revenue.
2. The strength of the Renminbi. I don’t think china will let it (can’t?) strengthen until they turn to more domestic consumption. Also they would be loosing quite a bit in US treasury debt…. I wonder why they want to sell?
A weaker dollar right now is great for everyone domestically but a killer for us working abroad! It is one of the best solutions for the current crisis IMO. At some point we will see inflation…… How this will change economy… TBD…
All of these are more medium term solutions…..
As far as as long term solutions……..
Jim,
ENB reached target price and I have been reading reports about earnings growth (20% next year and 10% through 2013). I don’t have a good understanding of the company. What are your thoughts?
henry2009,
I wish I could share your optimism, but …
(1) market is indeed overbought, just looks at the forward projected P/E’s – they are way higher than historical ones,
(2) lot’s of good things we see is just a temporal effect of the stimulus either in the US or in China, or somewhere else,
(3) unemployment is still going up,
(4) wars in Iraq and Afghanistan are still consuming our money
(5) we buy less from China, we buy less oil, but we still maintain trade deficit
I am not economist, but I do not see health anywhere. I would be glad if someone could open my eyes and show me the signs of real progress. It seems to me that we are all sitting in a car with the windows closed and are trying to shake it to make ourselves convinced that we are actually moving.
Jim, I found you by chance last night by putting your name in a Google search. When I saw your site, I got a natural high knowing that I could access your insight and stock picks again. A question, have you been keeping up with Jon Markman and how he has turned so bullish, even suggesting a 300% DOW move in his last MSN Money column “the Dow Jones industrials rose 300% over the four years from July 1932 to January 1937. That’s more than three times the move from 2003 to 2007. Place your bets.” Why he has lost his caution simply baffles me as I never would have expected that considering how correct he was with the crash.
Hi Jim, sure missed your keen insights when you were gone, but love your new blog format.
If I’m not mistaken I seem to remember you not advocating selling and re-buying partial positions because it would make the bookkeeping for your picks a nightmare. I just want to state I think it’s prudent to sell partial position to lock in profits, especially if you believe the market is over extended and you can repurchase them at a cheaper price. I know timing the market accurately is next to impossible, but if you have a large position thats at, or close to, your target price I have no problem selling a third or half of my shares and if possible buying back later.
You never lose money taking a profit.
Regards,
pk3hi
Regards
pk3hi
The fact that there are still many doubters as smart as Jim out there makes me think the rally will continue in the near term …
Don’t get me wrong. I agree the market is over bought. But that doesn’t mean it will not continue to be overbought. Did we scream that the market was oversold in 2008 and early 2009 ? The market continued to be oversold. The “animal” spirit just started. It will run for a while.
Even from fundamental point of view the market is still under valued comparing to its historical norm. Yes, this time we got burned hard and may be it will be different. but is this recession comparable to the Great Depression ? We recovered even from the Great Depression. Corporate earnings are still very bad. The question is how much further it can go down and has the worst case been priced in. Looking ahead business inventory has fallen to historic low. Companies have been cutting costs all along. At some point they won’t be able to cut more and may have to increase spending. One company’s cost is another company’s revenue. If all companies have reached a point that they can cut a penny more cost I doubt the revenue will continue to fall. And when the recovery starts and it has started the demand will entice companies to spend more. Housing is stabilizing. Auto sales is rebounding. Financial system has stabilized … Stimulus projects are rolling out. Corporate America is becoming more lean and efficient … Interest rate is so low … Inflation is not a problem at least short term … People will not forget the lesson from 2007/2008 until another 5 years … The world economy is rebounding and China is the locomotive … All these green shoots plus the huge cash on the sidelines and nervous fund managers will keep the rally going to early 2010. Look at the banks and see how depressed they still are in terms of stock price and earnings. Their recovery has just started. Currently I am extremely bullish on banks. The huge yield curve is their friend. When housing stablizing their toxic assets may not be that “toxic” …
Now I want to talk about when I will see the market topping …
1. The market won’t go up on good news
2. When doubters like Jim admit they are wrong about the market (That doesn’t mean they are wrong about the economy). And forced to buy …
3. When my colleges and friends get started and keep asking me what stock to buy ..
4. When the market has gone up another 30 to 40 percent …
See ya there at the top 🙂
Hi Jim., please let us know if you are tracing “bearish divergence” and technical indicators are starting to suggest a reversal. I would very much like to exist some positions.
thanks,
I was reading a chapter in your book. The psychology of all of this is interesting. People can make money but lose it just as fast. I have now been burned a couple of times and am in no hurry to rush into this thing. So much uncertainty- healthcare reform and its price, cap and tax and the price it could hold for the economy, and so on. A few dumb moves by Congress could bring this to a head. I heard one pundit espousing the idea that the market has done so well lately because the negative press seems to be slowing Congress from spending though I’m not sure that govt spending is being truly slowed.
I like your picks and own POT, MSFT, and a very small amt of JOYG all were good picks but I believe your rationale for POT is excellent.
Keep up the good work
Dermp1
I agree that the fundamentals represent the 9000/1000 levels but the combination of emotion and trillions in sidelined cash, watch out for a rally up to 11000/1250. The shorts have been beaten and temporarily banished away to their weird little dungeons to drink heavily and await the next correction.
I meant SYT
Jim
Did you write your blog comparing MON and SYNT?
Let me repost my answer to a similar question that I wrote on another post today:
“Got to be careful how I answer with the market in momentum rally mode. So let’s be very precise on what we mean by short-term. In teh short-term–if by that we mean days and maybe weeks–I think the ralloy continues even though it is hugely over-extended. At some point though I think we get some real data that iindicates the economy isn’t as good as everybody hopes it is and that disappointment takes us back down to a retrace of 1/3 to 2/3 of the rally. When that disappointmebt sets in is a good question. On the one hand, I can see this running into October as money managers decide they have to be in. On the other hand, the negative real data is out there to disappoint now if investors want to see it. So this rally could crack as early as mid-August or September. At this point, I’m not selling but I’m sure not buying into S&P 1000 either. That’s about as precise as I can be at this point. Sometimes confusion is just well confusing.”
Jim,
I totally agree with you. Markets are way too overpriced at this point. I understand that people what to cheer up, but I just do not see any reasonable justification for buying stocks right now. All fundamental indicators show that market is up for correction.
My only question is – when do you think this rally will come to its end?