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.

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.

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.

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.

Bear Market Delay -- Part 1

Here is a great article at SeekingAlpha on why we will not have an immediate bear market.  The author presented excellent historic charts to show that the current bull market still has room to run.  For example, the author showed a bar graph of how the bull market of the 1990s lasted quite a bit longer than today's bull journey.  He also presented a P/E illustration about the market in the year 2000 where the P/E was a whole lot higher than the current situation. 

So, the bull market has further to run, but the author suggested being defensive about it since further gains will probably be difficult.  You will have to be able to pick the best stocks and ETFs.  I own AAPL and UDOW in this area, but I consider them as trades since the market will most likely decline again.  As for defense, the author specifically mentioned TLT, the long government bond ETF.  I agree with this choice although I hold TMF instead which is a 3x long bond ETF.

Dow or S&P 500

Remarkable U.S. economic good news and Japan's improvement set the stage for a great November-December bull rally.  What happens in 2015 is another story, though.  I plan to make money while I can in the present.  The recent 8%+ decline gave some breathing room for a stock market advance before the next pullback occurs.

I bought UDOW, the 3x Dow ETF, this past week because I believe the Dow large caps will outperform in our current market.  I also bought Apple because I believe the company will make a significant gain between now and the end of the year due to Christmas phone and computer sales.  After the last two months of 2014, though, I will probably take profits while I have them and wait for the next decline before I buy again.