Market Top Signals
For many months I have written about the over valuation of the stock market and the need to hedge one’s portfolio.
There are street savvy experts and Nobel Prize winning financial gurus that I follow. Over the years they have hit the market moves consistently on countless times.
Here are some of their excerpts to make my point.
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• According to midyear annual data the median U.S. stock price in 2014 stood at a post World War II high of over 20 times earnings.
• The median price-to-cash-flow ratio, at 15, was also at a postwar high. In fact, the median P/E alone had jumped from around 12, at the depth of the Great Recession in 2009, to the aforementioned 20-plus.
• After similar previous highs of the median P/E in 1962 and 1969- the periods most comparable to today’s broad-based high valuations- a nasty selloffs of 27% and 35%, respectively, occurred.
• They are all concerned over the declining participation of individual stocks and sectors in the market’s snapback rallies in the past six months. This phenomenon can be seen in declines in the advance/decline figures and the number of stocks hitting new highs and trading above their 200-day moving averages.
• Complacency has replaced fear.
• A growing boom in “nonpurpose loans” that Wall Street is proffering to wealthy clients who have large portfolios of stocks and bonds that serve as collateral for the borrowing. The only proviso on the cheap financing is that the money not be used for securities purchases. The money is going into illiquid assets like second homes, condos for mistresses, yachts, and insensate consumption. In a market selloff, the liquidation of securities collateralizing these loans could add tinder to any market conflagration.
• The psychological setup for a market bust has been present for more than a year. Investor liquidity continues to dry up, and sentiment indicators show increasing stock-investor derring-do.
• A resurgent U.S. economy will not afford much protection for stocks. Take the much-heralded initial jobless claim numbers that hit a 14-year low last fall. That number also hit lows in June 1987, March 2000, and June 2007, which were all close to major market highs.
• Coincidence or correlation? Who knows. But we’ll most likely find out soon.
Look at your Investment Policy statement and review how much of a loss you are willing to take in your portfolio. Then, hedge your position so you do not lose any more than that amount.