1/29/2013 2:30 AM ET|
Will investors' fears kill the rally?
You hate to miss out when the market is rolling to new highs, but there's a creeping suspicion that this rally will top and crash as it did in 2000 or 2007. Here's how to keep the fear under control.
I think every market moment should have a theme song that sums up its emotional tone.
Right now, as U.S. stocks sit at five-year or even all-time highs, and the Standard & Poor's 500 ($INX) tries to decide if it really, really wants to break above 1,500 and stay there, I think we need a ditty that captures the worry that market good fortune can bring. One that reminds us that at points like this, the biggest danger to the rally is that investors will scare themselves into a market retreat.
If we can remind ourselves of that tendency, and make it conscious, then maybe we can do something about it -- like try to figure out how much of the worry that we're feeling right now is a rational response to market conditions and how much is emotional baggage that we should shrug off. We also need to figure out what kind of strategy we can use to cope with the possibility of a market retreat on sentiment.
That is the subject of this column.
But let's begin with my choice for anthem for the moment: the Dan Hicks & the Hot Licks song "I Scare Myself."
The wail of worry
For those not familiar with the Dan Hicks oeuvre, "I Scare Myself" goes like this:
I scare myself
and I don't mean lightly
I scare myself
it can get frightenin'
I scare myself
to think what I could do
I scare myself
it's some kinda voodoo.
Why do those lyrics strike me as appropriate to the current market?
Because they speak to the traditional investors' dilemma in a rising market. We know we're supposed to let winners run (and cut our losses). But that advice is hard to follow, because we get nervous when the stocks we own rise. Our very good fortune makes us second-guess our good fortune. We can't help thinking that it's a good idea to get out before the market gods turn against us.
If it were just you and me having this random thought cross our minds, the best solution would be to find ourselves a good shrink. Maybe someone like Mel Brooks' Dr. Haldanish, who cured Bernice of her compulsion to tear paper by saying, "Bernice, don't tear paper." (Find the skit on Bing.) We'd do better as investors if we just got over our psychological problems.
But this isn't an individual psychological problem. It's a rising collective worry right now. And it's the collective nature of the worry that makes it a market force with the potential to move stocks. If you and I were the only investors or traders thinking about this, who'd care?
But you don't have to work to find evidence of the collective nature of this worry. In the past week or so, it has become a nagging voice that won't leave you alone.
There are the stories about market complacency and more reminders that stocks are at a five-year or record high. You don't have to dig very deep to hit subtext here: Remember, these stories urge, the tops and crashes of 2000 and 2007.
There are the survey stories that report individual investors are moving back into stocks. Or that this or that class of professional "smart-money" investors has become increasingly bullish. The message here is pretty simple, if somewhat contradictory. Individual investors are "stupid money" that goes long stocks near a market top. Professional investors, on the other hand, aren't as smart as they think they are, and in their arrogance push strategies further than they were meant to go.
And finally there are the indicator stories -- more or less based on more or less historical data -- that discuss evidence that this market is nearing a top. An example is a piece by Mark Hulbert, the editor of Hulbert's Financial Digest, which cites a study by Ned Davis Research called "Leading Sectors for Calling Bull Market Peaks." The financial and utility sectors, the study notes, have tended to underperform in the months leading up to bull market peaks. The consumer discretionary and consumer staples, on the other hand, have tended to outperform. And, unfortunately, Hulbert notes, returns in the past three months for three of these four sectors are consistent with the formation of a top. (The performance of the financial sector doesn't fit the pattern, but, Hulbert notes, maybe that's because the Federal Reserve's actions have propped up the sector. Perhaps, I'd say. But then the Federal Reserve' actions have propped up the whole market.)
The last time the market showed this four-sector pattern was in May 2011. That ushered in what turned out to be a 20% correction from the spring high by the time it ended in October.
On the edge
It's easy to pooh-pooh these fears. After all, remember what has changed in the two weeks or so since we were cheering on the indexes as they recovered lost ground and appeared ready to make new highs. The U.S. debt ceiling battle is over for now. In Europe, Ireland and Portugal have moved closer to returning to the debt markets. The Bank of Japan is moving closer to a major new stimulus. And all the signs from China are pointing to slightly faster economic growth.
I don't much like the current stock market -- to me, it is too dependent on a flood of cash from global central banks and not enough backed by fundamental growth. At some point, I worry, the central banks will have to take away the punch bowl and the party will end. The only question, in my opinion, is how fast the economy is growing by the time the stimulus comes to an end -- and I fear it won't be growing very fast.
To me, these forces -- central bank cash and slowing economic growth -- are potential problems for the second half of the year. But right now, while I don't see any good fundamental reason for global stock markets to be rallying so strongly, I also don't see any event, forecast or report in the past week that says, "Hey, we've hit 1,500. Now it's time for a correction."
That doesn't mean, to my mind, however, that investors can simply ignore the possibility that we scare ourselves into a market retreat.
VIDEO ON MSN MONEY
"I don't much like the current stock market "
I like Jim. He gets off a gem like this one from time to time. Sometimes Jubak has to talk like folks talking to folks. And I agree with him, and I'm just folks.
I don't much like the current stock market either.
Money is flowing into American markets from around the world like water. Out of fear. And the markets are therefore so oversold.
Rally? What rally? Businesses are closing right and left here in upstate NY and people cannot get jobs. Schools are running budget deficits. Towns are consolidating because they cannot afford a police force. Rally? WTF!!
The People’s Bank of China has already reduced its holdings of US treasuries below those of Japan and last announced a change in its gold reserves in 2009 when it declared a 76 per cent hike to 1,054 tonnes. Germany, Italy, France and the US keep more than 70 per cent of their reserves in gold, the last bulwark against the devaluation of money printing.
China Launching Gold Backed Global Currency 4.7 out of 5 based on 3 ratings.According to the article, China is recasting all of their gold reserves into small one kilo bars in order to issue a new “gold-backed” currency. Many say this will disrupt global trade and will eventually cause a collapse of the US dollar.
There can be no doubt that the US dollar will soon be history. China is recasting all of their gold reserves into small one kilo bars in order to issue a new ‘gold backed’ global currency. This is surely a strategic part of their recent push to sign new trade agreements with Russia, Japan, Chile, Brazil, India, and Iran. The cat is now out of the bag, the US will be given the ‘bums rush’ by the largest trading nations in the world and the dollar will go down in flames. GATA now estimates that 80% of the gold that investors believe they have in allocated accounts is long gone, the majority of it probably wound up in China.
Here is an excerpt from Jim Willie’s ‘Hat Trick Letter’
Jims recent article starts out with…
Many are the events, signals, and telltale clues of a real live actual systemic failure in progress. Until the last several months, such banter was dismissed by the soldiers in the financial arena. But lately, they cannot dismiss the onslaught of evidence, a veritable plethora of ugly symptoms of conditions gone terribly wrong and solutions at best gone awry and at worst never intended in the first place.
China is well along an ambitious plan to recast large gold bars into smaller 1-kg bars on a massive scale. A major event is brewing that will disrupt global trade and assuredly the global banking system. The big gold recast project points to the Chinese preparing for a new system of trade settlement. In the process they must be constructing a foundation for a possible new monetary system based in gold that supports the trade payments. Initally used for trade, it will later be used in banking. The USTBond will be shucked aside. Regard the Chinese project as preliminary to a collapse in the debt-based USDollar system. The Chinese are removing thousands of metric tons of gold bars from London, New York, and Switzerland. They are recasting the bars, no longer to bear weights in ounces, but rather kilograms. The larger Good Delivery bars are being reduced into 1-kg bars and stored in China. It is not clear whether the recast project is being done entirely in China, as some indication has come that Swiss foundries might be involved, since they have so much experience and capacity......
Maybe fear about how the printing of 40 billion per month and buying bonds with that "magic money" affects the numbers of any rally?
I don't think he is too far off, as i started paring a bit yesterday. I am one of the people he describes. If we match the all time highs i will be totally out by then. Probably before.
What makes me nervous is all the money printing. It is holding down the rates the govt pays for our debt artificially waaaaaay low. If they stop printing, or we get inflation from all the printing(my guess), rates go up and our soon to be 20 Trillion dollar debt will be costing us a Trillion or more a year in INTEREST ALONE. What is candy for the market now is going to be poisen. All this massive borrowing and printing can't help but blow up. I'm usually an optimist but i don't see any way this doesn't end badly. Guessing 2 or 3 years.
Look - all we are is at the same point we were in 2007 ! It's been a 5 year correction folks ! This and add in Inflation and QE-1, QE-2, QE-3 and technically we are not even where we were in 2007 -2008 !
This market very well have "corrections" but in no way is it oversold. We have to cross 15,000 for that !
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