For those who only watch the headlines, the stock market looks as if it’s doing a pretty decent job digesting 6 years of gains. The Dow (DJI) is hanging out near record highs in the 17,000 area, the S&P 500 (^GSPC) is within 2% of the once unthinkable 2,000 mark and the Nasdaq (^ICIX) is higher than anytime in the last decade.
Or maybe this is just the lull before the storm. As Josh Brown of the Reformed Broker CEO of Ritholtz Wealth Management notes in the attached clip, under the surface things are worse than they seem. Small caps are underperforming, the Nasdaq is being led by a tiny fraction of major stocks and it’s all but impossible to find ideas that are particularly fresh by any reasonable standard.
For want of a better term the market is choppy and choppy is bad. “Tops are a process. A choppy market can sometimes be indicative of a change in trend.” When you’re six years into a bull market and long stocks there’s a good chance you’d prefer to have the upward drift in the market continue.
Brown, who was my co-author on Clash of the Financial Pundits, isn’t a fan of turning vague observations about stocks into financial transactions. He’s got his clients’ money diversified across a well diversified collection of assets.
“We’ve got long-term treasuries that are actually the leading asset class of the year, we’ve got emerging markets in the portfolio. We’re allocated elsewhere outside of equities. If there is to be the 10% correction everyone has been predicting for 45 months, let it come. We’re investing for 20 and 30 year stretches at a time.”
If that seems hard advice to act on that’s more or less Brown’s point. Cumulatively, over-trading has cost investors more money over the years than all the corrections and crashes in history. Brown says he’d rather cause himself substantial physical harm than engage in the endless game of guessing when the next 10% move lower in stocks will arrive and try to time his portfolio accordingly.
Every divergence and sell signal is harrowing until it isn’t. This rally has been characterized by a failure of all the horrible things that were supposed to happen ever coming to pass. Jumping out of the market because you’re convinced you found the sell-signal that marks the beginning of the end is a great way to maximize your chances of failing to meet your investing goals.
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