Sunday, November 16, 2014

Signs Of A Market Top

Jesse Felder has written an outstanding article on signs that we are at a stock market top.  I agree with Jesse that we are near a market top, but no one knows when stocks will fall.  It could be next month, next year, 2016, or later.  It pays to be looking for the exit doors, though, so that you can get out with most of your money.

One point Jesse made involved a Federal Reserve chart comparing the GDP and ownership in equities.  We are greatly overbought on stocks compared to the gross domestic product, and this usually means a market top.  Another point the author made was that we have fewer than normal stocks above their 200 day average lines, and there is also a downtrend in this respect.  So, the market is being held up by a minority of big cap stocks, and this scenario cannot continue indefinitely.  We need to be careful about holding stocks nowadays, and we need to have a good exit plan.


Market Top Signs Through Bonds

Seeking Alpha has an excellent article on why the high-yield bond funds HYG and JNK are being misused to call market tops.  The author correctly showed that you need to look at the composition of the bond funds to determine if the decline is predicting a stock market fall.  For example, the highest allocation of HYG stocks is currently in the oil and gas sector which is experiencing a large pullback.  So, the HYG chart simply indicates that one of its prominent sectors is temporarily down.

Secondly, the author stated that if you are comparing government bonds to junk bonds to predict a top, you should not use TLT because the long-term government bond has a much different maturity time frame than HYG or JNK.  It would be more accurate to compare the shorter term government bond funds IEF and IEI to HYG to decide if there is a run to safety.  I agree with the author although I believe we are getting close to a market top.  2015 will most likely be a volatile year, but a stock market bear phase is probably around two years away.  I plan to buy UDOW whenever it dips back toward $110 per share, and I will sell the stock when it gets somewhere over $130 per share as long as the main trend of the market is up.

Sunday, November 9, 2014

Bonds For Volatile Times

Here is an excellent article at Seeking Alpha about adding bonds to a diversified portfolio.  Like the author mentioned, some people shy away from bonds, but they definitely have a place in a safely allocated portfolio.  You can own junk bonds through JNK to capitalize on what remains of our bull market while you can hold BND, Vanguard's total bond fund ETF, for overall stability.  You will need to be agile when we enter a new bear market, though.  The author talked about how JNK fell 25% in 2008 while BND was up almost 8%.  So, even a well diversified portfolio will need to be monitored and adjusted for new conditions.

XLU -- The Best ETF For Volatile Times

Seeking Alpha has a page of articles about why XLU, the SPDR Utilities index, is a great diversifying stock for volatile times.  XLU has gained around 17% in the past 12 months, and it has gained more than 9% in 2014.  It also pays a dividend of more than 3%.  When the market corrected around 9% in September and October, XLU held virtually steady at around $42.  Then, it gained almost 10% to over $46 when the bullish recovery took place.  So, XLU should be a part of each investor's portfolio.
 

The Bull Case

Chris Puplava at Seeking Alpha has presented an excellent bull case for stocks.  I expect we will have a rally for another five weeks until the next Fed meeting.  I agree with Chris that the long-term is bullish, though.  We will definitely have some corrections next year, but they will be buying opportunities as long as the economy continues to do well.

One point that the author mentioned was a large percent of new highs.  Secondly, the Philly Fed State Leading Index is very positive for economic conditions.  Thirdly, the percent of S&P 500 stocks that are above their 200-day average is at 73% now.  Fourth, the technical charting of stocks is bullish.

Chris mentioned that signs of a true market top, like 2000 and 2007, occur when the technical and economic indicators are both declining.  In addition, we are not having any employment problems.  If jobs were falling instead of rising, that would be a red sign.  So, we are safe for now, but volatility will become more pronounced in 2015.


Saturday, November 8, 2014

Year End Rally

Here is a good article by Bret Jensen at Seeking Alpha about why stocks will probably rise through the end of the year while a correction is almost certain in 2015.  One reason for stock prices increasing is that fund managers will be buying the dips according to Bret.  They will be trying to catch up on their benchmarks to look good for the year.

One reason for volatility in January will be escalating political tensions when the new Congress is seated in January according to the author.  Secondly, a bad winter could cause the economy to contract just like it did in the first quarter of 2014.  Thirdly, we will not be getting as much help from the Federal Reserve.  So, I will be taking profits toward the end of the year just like Bret since there is no telling what might happen in 2015.

Saturday, November 1, 2014

Bear Market Delay -- Part 2

James Kostohyrz has written a very good article on why we just had a correction in October instead of a beginning bear market.  He brought up the fact that interest rates are still low, and there is an old saying that "stocks will grow when interest is low."  This has certainly proved to be true for more than five years now. 

Secondly, James mentioned the TINA principle--There Is No Alternative.  Since bank accounts are near zero on interest, and the ten-year bond is only paying a little more than 2%, people are being pushed toward buying stocks to gain a bigger percentage return for their money.  Like the author discussed, I believe the next bear market is 1-2 years away.  When the ten-year bond interest reaches 3.5-4% and stocks are a lot more overvalued, that will be the time to head for the sidelines.