With the S&P 500 finally setting new record highs after over a year of trying, I wonder if people who are light on stocks are feeling like they're "missing it?" Are those folks more likely to buy into the stock market now that it's at new highs? Or do they have the discipline to wait for better opportunities?
I have one Millennial friend with a $17k rollover sitting in cash burning a hole in his IRA. He's anxious to invest. I told him this spring the S&P 500 would likely get a correction and that he should pick his spots. He's already saying things like "it never came" with regards to a correction.
The reality is that a correction has been here for almost two years. "It" just hasn't hit the market all at once. What we have seen is a weird sort of "rolling" bear market that has hit different segments of the market at a time without pulling the whole thing down. I discussed this concept well ahead of most pundits in my New Year's letter: A Stealth Bear Market Crashes In.
As folks can see from the S&P 500 chart superimposed upon the increase of Federal Reserve assets, the stock market has been in a range ever since the Fed started to taper and hold the line on new balance sheet obligations.
It is no coincidence in my opinion that the lack of Fed "help" for the markets has resulted in a flattish period for stocks overall. We know that we are in for "slow growth forever" in the general economy, why would the stock market be any different. The question that investors should ask is, "will the stock market finally turn over and have a broad correction?" The answer is as always - "eventually."
The current technical set-up suggests we could get a small correction, single digits, imminently, but that we would see a rally following. While I don't buy into much technical analysis in an age of algorithmic trading robots, Elliot Wave traders are calling for one more wave up before a more major correction, and that seems plausible to me.
The rolling set of corrections has been good for the best traders and bad for almost everybody else. Most mutual fund investors have only made a few percent the past two years. The lack of returns has pushed a lot of people towards trading and that's a shame. Folks ought to be using the rolling corrections to establish good long-term investments as the corrections occur.
Here at Fundamental Trends, we have what we call our "Very Short List" of stocks to invest in, as well as, our ETFavorites. Our buying method is fairly simple: as price trends stabilize in a particular asset, we simply set low limit orders (or sometimes sell cash-secured puts) and wait for our prices to hit.
Several months ago we bought the SPDR Gold Trust ETF (NYSEARCA:GLD). We also bought EXACT Sciences (NASDAQ:EXAS) on a swoon before the recent rally. More recently, we had limit orders for Potash Corporation (NYSE:POT) and Silver Spring Networks (NYSE:SSNI) trigger very near 52-week low stock prices.
For those who "feel" like they should be "doing something" to make more in the markets, my first reaction is "slow down, don't speed up." I understand the psychology of wanting to get active. For most folks that means try to become a trader. The problem is your competition. It is virtually impossible to compete with the algos, proprietary traders, hedge funds and a very networked set of former industry people who are now day traders.
Instead, take the time to understand what is really going on in markets. It is not hard to see that aging demographics and global debt are huge headwinds to global economic growth that will last for decades. Central banks are doing what they can to smooth the process, but as reality sets in to more and more people, they will be hard pressed to keep smoothing things. We are already seeing the limits of central bank effectiveness as they trend further and further into experimental monetary policies like QE and NIRP. Eventually, we will get a big, broad correction that will be easy financially, but hard psychologically, to invest in. Until that "big correction" occurs, we will need to continue to pick our spots.