There is so much talk lately about the imminent correction heading right for us, probably because the market has made some solid gains lately. With everyone you talk to and hear on TV saying that the market has to correct soon, it can be hard to tune out the noise and just listen to the news. To be honest, it's pretty easy to get caught up in the noise because what we hear makes sense, "the market is overbought" or "keep money on the sidelines to buy on dips." All the charts and data point to we are at or near market peak, but I look at the market from a different but important view: common sense. I have some reasons why I don't think the market will be correcting dramatically anytime soon. As I type this, the market is down for the last 2 days coming into the holiday weekend as the bears are screaming louder everyday that we are doomed!
Reason 1. CASH
Everyone's got cash. We've been hearing about the market correction for awhile now, and the market (and talks about the correction) have been heating up lately. But don't most markets crash when everyone is fully vested and there is no more money to buy stock? How can we have a correction if everyone has cash? I usually don't watch the market, but the semester is over, and I have free time during the day, and I have noticed that every time the market drops a percent or more, it rallies back within a few days, if not intraday (like the end of this trading week.) Message: If I have cash, and you have cash, and our neighbors have cash, how is the market going to drop 20%?
I think we have a long way to go before the rally is over, retail investors have yet to pour into the market, and with most investors holding cash, it doesn't seem likely right now. Bear markets occur when we least expect them, not when everyone thinks it is happening tomorrow, right?
Reason 2: Heard the Herd
As I touched on above, if everyone is saying the market has to correct, how can it? If everyone in the herd listens to the shepherds, then everyone in the herd will be just like the picture above. Following the herd, and your mistakes are everyone else's, which make them more palatable, which is not a good investing persona to have. I'm 25 and invest for my young family, and it's tough to tell people that have been investing longer than you've been alive that you think they and everyone else are wrong about the market today and you won't take their advice. They don't like that much, but a man's gotta do what he thinks is right. Message: Follow the herd off the cliff or stand alone on your convictions.
3. The FED
The Federal Reserve and QE3 have helped free up liquidity by offering cheap money by buying large amounts of Treasuries and mortgage-backed securities. As long as the FED is pumping close to $3 billion A DAY into the economy, I don't think we will see any major downside surprises. However, talk, specifically the Fed minutes, is spooking investors, because some of the board members are talking about tapering QE3 as early as June of this year. When we separate the noise from the news, it is easy to see that the Fed won't taper in June (or this year) because, as the whole point of the program is to create economic confidence in our country, why would the Fed taper off after a few months of good news and a market rally? The Fed's dual role is to maximize employment and keep prices stable. Unemployment is still above where the Fed's own threshold for ending QE3, and inflation is negligible currently, so what's the problem? As long as inflation is low and unemployment is high, the Fed will continue the program until the economy improves. Message: Don't fight the Fed.
There are some traditional warning signs that we are at a market top, such as share buybacks are at an all-time high, which must mean that a correction is looming. And to be fair, a correction is looming, but unless something drastic happens and we are blindsided, the market will just keep going up. The market will correct, but not when everyone thinks it will, only when we think it won't happen, that it usually does.
I held cash until two weeks ago, when I decided enough was enough, and I put the 16% cash portion of my portfolio to work; I bought BP (BP) and Philip Morris (PM). I'm going to be fully invested while the rest of the market holds cash, and when the rest of the market is fully invested is when I am going to hold cash. Click here for what I would buy. Right now, when everyone has cash is a great time to be invested while cash-holders are skeptical. When the cash-holders and retail investors dive into the raging bull market, that's when I will take trade in my stocks for a wheelbarrow full of cash.
Should you still be hoarding cash?