Dissecting The Irrational Enthusiasm For Stocks

Includes: GLD, SPY
by: David Fabian

The market is designed as a mechanism to humble even the most confident investor. At one point or another, we have all been caught up in the rapid groundswell of enthusiasm that supports any bull market. The fever, the euphoria, and the hype are all designed to get you on the same side as the rest of the crowd.

The SPDR Gold Shares ETF (NYSEARCA:GLD) had an amazing run from 2008-2011. I remember the advertisements on TV for gold IRA's and merchants hawking "cash for gold" on every corner. It seemed for a while there that gold would never lose value. Everyone who was in it was sure to make money. Every expert touted its inflationary attributes and long-term track record. Those that got in early surely made a lot of money and are patting themselves on the back for their prescient timing and intuitive foresight.

But what about those that weren't so lucky? What about the investors who held out for so long and then capitulated near the highs?

They are more than likely sitting on hefty losses and cursing themselves for not heeding the warning bells that were flashing in the back of their minds. It happens to the best of us and can be a frustrating cycle of greed and fear that continues to erode investor confidence and trading discipline.

In that same vein, I was not surprised to see a recent story about US equity fund flows seeing record volume in July. Stock ETFs and mutual funds pulled in a staggering $40.3 billion in a single month while the SPDR S&P 500 ETF (NYSEARCA:SPY) was hitting new highs. Performance chasing investors were likely lured out of bond funds near their lows and into stocks near their highs as they try to assuage their performance anxiety. The story did note that an even greater amount of money went into cash and money market funds as well.

From a technical standpoint, we are now 7 months into the year without a meaningful correction to speak of. Using recent history as a point of comparison, every year following the financial crisis has presented some sort of equity market volatility greater than 5% except 2013. It goes without saying that with prices at all-time highs, markets have become more risky as general complacency has set in. Investors casually tilting their portfolio toward stocks at current levels could be in for a rude awakening if any leading economic indicators falter.

John Templeton was famously quoted as saying:

"If you want to have a better performance than the crowd, you must do things differently from the crowd."

With the majority of the crowd now fully on board the bull market train, I have been tempering my enthusiasm for stocks over the last few months. That has meant repositioning my growth portfolio to have a higher than normal cash position and preparing a buy list for new equity opportunities. While I have certainly missed out on a marginal amount of upside in the last several weeks, I am comfortable with a strategy that includes pairing back my stock exposure and taking a patient approach to new allocations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: David Fabian, Fabian Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.