The bull market we've experienced over the last few years has been absolutely great. Since 2009 the market has been chugging along providing significant gains for those invested. We are heading to four straight years of significant growth, with the Dow Jones Industrial Average at almost double what it was at its lowest point in 2009.
(click to enlarge)People are piling into stocks like the days of yore. Big names in investing are publicly calling for the public to keep pouring into stocks. CNBC and Seeking Alpha are among the many sites where contributors continue to advocate taking long positions in the market now - and that's actually one of the big things that worries me.
Just like a lot of things in finance, by the time the public starts to get the message, the smart money has been made. It's an unfortunate fact, but every bull market must come to an end and there's always bagholders that wind up buying at the market's highs. This is usually made up by the uninformed public and the mom & pop investors who get the message years late. The same thing happens with individual equities when they reach peaks; someone gets stuck holding the bag and it's usually the commonfolk. Nobody likes being the last one to leave a party and, unfortunately, I contend that this is the point that the market as a whole has reached.
In My Definitive 17 Cardinal Rules for Investing Success, I talk about the importance of considering the opposite of what the public is doing:
"Fade the Public"
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
- Warren Buffett
In sports betting, when one side of a game is overwhelmingly being bet on by the public, the line on the game moves. Similar is the way the price of a stock moves in accordance with the demand. More sells than buys, price moves down. More buys than sells, price moves up.
"Fading the public" simply means doing the opposite of what the public's doing. It's important to not blindly just do the opposite of what the public's doing; the public creates important trends that need to be respected and noticed. In the world of sports betting, the benefit is usually a couple extra points on a line; in finance, the benefit is usually a cheaper share price to buy at or a higher share price to sell at. Keeping your emotions in check is vital, as I'll discuss later. These strategies play off the emotional instability of the common investor.
Keeping yourself in this mindset of doing the opposite of the public is how big money makes money, and how you can, too. The sooner you start to think like one of the sharks, the less chance you have of becoming eaten alive.
This is a perfect opportunity to put that strategy into practice. I note in the same article:
Even if you don't think you are, you are part of the mass pool of money that makes up retail investors USA. Everything that you're looking at has already been looked at fifty times over by some analyst somewhere at a fund or firm. You are one of the sheep. Your retirement accounts and your hard earned money that you've saved with your blood, sweat and tears are gambled with on a daily basis by banks.
If you've made money through this bull market, I contend that it is time to take your profits.
It Was an Impressive Run
This diagram, although about a year old, gives a good snapshot into how long most bull markets last. As you can see, we're pushing the average and median with each day that goes by.
The next chart is also about a year old -- but it gets the point across. The returns this bull market have provided relative to the returns of previous bull markets are astronomical. It hasn't just been a "good" four year run, it's been a great one.
It is also worth noting that the volatility index ($VIX) is extremely low (hit a low under 12 today) and that low volatility isn't always a great sign. Just as it can be a sign of consistency when it's between 20 and 35 as it has been, the very low number could be signaling a major upheaval in trends coming and the tide turning on a much larger scale. The Central Banks have given the public the impression that stocks are untouchable and the market will never die down. People are pouring (sometimes borrowed) money into stocks. What could go wrong?
With a correction coming and (NYSEARCA:GLD) tapering off recently to what I consider to be bargain prices, it could be a great time to introduce the precious metal to your portfolio after taking profits from stocks. I'd advocate considering silver (NYSEARCA:SLV) as well.
Some analysts are seeing the picture clearly, as well. Stanley Druckenmiller, founder of Duquesne Capital, recently expressed his sentiments in a CNBC.com article.
Druckenmiller also called the Fed's bond-buying program - now in round three of quantitative easing - the biggest "wealth transfer" and "trickle-down" monetary policy.
"Those purchases are cancelling market signals," he warned. "The bond market and the stock market have provided wonderful signals for many years as to potential problems."
"Maybe we're in the 7th or 8th inning" of the stock market rally and it could end in one of two ways, Druckenmiller cautioned. "With a mal-investment bust like in 2007 and 2008. … Or it could end in monetizing the debt and off we go in inflation."
Furthermore, large company indicators of the economy as a whole like Wal-Mart (NYSE:WMT) have noticed some reduced spending. Alex Heisenberg writes about this correlation in his article "Wal-Mart Has Me Nervous About the Economy". He says:
CEO William Simon mentioned the customer is pressured by "jobs, jobs, jobs, jobs, unemployment, and security." He then mentioned the payroll tax increase and "the customer is figuring out a way to work around it." Translation to me: the customer is cutting spending at places such as Wal-Mart. He then mentioned that the customer is "very sensitive to the run up in gas prices." Very sensitive? Translation again: that sounds to me like decreased spending. On a positive note, he mentioned that the customer continues to "rely" on Wal-Mart. Rely? Am I the only one who doesn't get warm fuzzy feelings when you refer to a customer as "relying" on your company? It's great that customers are choosing Wal-Mart though for price over the competition, but I'd like to see more a uplifting tone as we heard less than 2 weeks ago with the Q4 report stating "business is sound" and "increased activity."
Don't get me wrong. Wal-Mart is a wonderful, very well managed company that will continue to grow over time. I'm concerned about possible near-term weakness and if that's a reflection of weakness in the broader economy.
Barry Knapp of Barclays echoes those sentiments in this CNBC.com interview:
Weak growth numbers will hit a couple of sectors hard in the second quarter of 2013, Barry Knapp of Barclays said Monday.
"What we think is likely to happen in the second quarter is the culmination of weak growth numbers, primarily attributable to fiscal contraction - and I care less about the sequester and the spending cuts than I do about the tax hikes," he said on CNBC's "Fast Money."
In December, Knapp called for a correction in the stock market of 10 percent in the first half of 2013.
Time to Take Your Bull Market Profits
A correction is coming. Although it may be a slight pullback before a bigger move up versus the floor falling out altogether, this certainly seems to be a beautiful time to realize some gains in equities that have produced results in your portfolio.
I wrote previously about taking profits:
You don't lose money any time you take profits. Read it again : You don't lose money ANY time you take a profit. Novice investors see profit in their account sometimes and proceed to just stare at it, allowing this unrealized gain to sit, gestate, and eventually disintegrate. Too many people wait fruitlessly for their profits in one position to make them their entire fortune. This almost never happens.
No matter what an investor or analyst tells you, we're all guilty of it. Starting out, with no basis in reality, you wait and wait and wait for stocks already in green to make even bigger percentage gains, never pulling the trigger to sell. When you see enough green to meet your preset caveats, pull the trigger and sell. Make your moves with discipline and precision; the investor with a plan makes money while the meek and unplanned are annihilated.
My mother used to say to me as a small child, "if it sounds too good to be true, it probably is." Contending that this bull market is going to continue with this force, fueled by central bank easing and controlling of the interest rates is looking at the economy through Keynesian blinders.
There is always going to be the eternal optimist point of view (read: bagholders) that's going to argue a bull market no matter what; but corrections and pullbacks are normal, healthy, and need to happen to maintain values. This investor and author thinks a correction is coming soon, and suggests locking those gains in and battening down the hatches beforehand. Then, consider bearish positions, whether it's ETFs, going long puts, or shorting equitites.
As always, best of luck to all investors.