It was a quarter to write home about. All three indexes made substantial gains but the S&P 500 Index had a great quarter and its best start of the year since 1998. Will it continue?
In the short term the answer is a definite maybe. If you put a gun to my head, however, I would bet that sometime in the second quarter we will have a correction. In April, if history is any guide, we usually see the peak in stock market performance. As the month progresses, investors begin to "sell in May and go away."
Monday, the markets received its latest shot of adrenaline when Federal Reserve Chairman Ben Bernanke assured investors that the easy money we have become addicted to is still needed. That sent the S&P 500 to its best closing level in almost four years. Those gains were led by the same group of stocks that have defied gravity and have continued to make higher highs without thought to earnings, price or any other metric of valuation.
One particular darling of the market that beings with "A" (hint: one of these a day is supposed to keep the doctor away) has witnessed its market value increase by $172 billion in the last two month. That is equal to the entire value of a large, well-established health care and consumer products company with over a 100-year history. It now represents 4.4 percent of the S&P 500 Index and by itself is larger than the entire U.S. utilities industry.
"A" will have to sell $2.6 trillion of products and services over the next decade (amounting to 1.5 percent of U.S. GDP) to justify that valuation. That would mean that every person in this country would need to spend $750 a year on its products for the next 10 years. I remember a similar period in stock market history in which valuations got this high and we all know what happened to the dot-com party.
Another indicator, the number of net new 52-week highs of stocks on the S&P 500 is shrinking from 280 in the beginning of February to 63 today. That should elicit some concern since the same index moved up from 1,345 to 1,408 during that time period. Warning signs like this abound but remember that markets can remain irrational far longer than you or I can remain solvent.
My sentiment indicators are still flashing amber as bullishness remains at historically elevated levels. If one looks at psychology, as it applies to market cycles, it appears we are on the other side of euphoria which is the top of the bell curve of investor emotion. To the right of this euphoric top the markets back and fill. We are in the complacency stage right now where most investors and market pundits believe that all we need do is cool off a bit before the next rally. What's after that?
If the markets begin to decline anxiety sets in followed by denial, panic, capitulation and then anger. This week we had three down days in a row, which is about the most we have endured all year. Many traders were expecting the quarter to go out with a big bang as institutional buyers did some end of quarter "window dressing." The opposite occurred and instead we saw some profit taking in the high flyers.
Historically, bull markets have averaged 39 months in length. If you date this one as beginning in March 2009, then this bull is over three years old. That means by the end of the second quarter, you should be wary of a market top. In addition, during the last 21 election years between March 1 and Election Day, the maximum correction has been a loss of 9 percent.
None of this is new information because everyone is looking at the same data. The question is when you decide to pare back. The greater fool theory applies less and less these days. Those who hang around to the last moment often find themselves with no one willing to buy their high priced securities. Don't let that happen to you.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at firstname.lastname@example.org. Visit www.afewdollarsmore.com for more of Bill's insights.
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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.