Negative GDP of -.1% dropped on Wall Street like a necklace of pearls rather than the atomic bomb it should have been. You know you’re in a bull market when the market treats good news and bad news with equal favor.
I’ve got to tell you that I am deeply concerned with this GDP reading and the markets complete indifference to it. It’s potentially a sign of real complacency, and complacency in the stock market never ends well.
A nice healthy pullback would have actually set my mind more at ease because that would be bullish. We’d get to clear out some of the weak hands to set the stage for another run higher.
But this week's “non-move” just had an ugly look to it and I’ve got to tell you now is not the time to go out buying stocks while they are at the very top of their trading ranges.
If you are sitting on the sidelines feeling like you missed the action, I’ve good news and bad news for you. The bad news is, you did miss the action! The good news is, if you are patient, new opportunities will emerge.
Where you will get into trouble is if you attempt to turn a missed opportunity into a new opportunity. You can’t re-swing at the ball that just blew by you. You have to wait for another pitch. The same is true in stocks; the most recent time to have been a buyer was back in November of 2012 when the S&P 500 was languishing down at its 200 day moving average at 1,350.
No amount of recriminations will bring that opportunity back. However, if you are patient, new and possibly better opportunities will emerge. I want you to always remember that the decision to hold cash is an investment decision. So doing nothing is actually a very important part of being a successful investor and trader.
Markets aren’t always amenable to traders and investors and knowing when to exercise your right to stay out of the market is very important skill. The good news is that it is a learnable one.
There are many indicators that you can use to divine whether the market should be bought or ignored. Fundamental investors use valuation metrics and technical traders use technical metrics. Whichever camp you happen to be in, (fundamental or technical) it’s important to have a series of rules that govern when you are in the market and when you are out of the market.
One of the technical indicators I like to use is the Investors Intelligence Sentiment Index. This index measures the percentage of advisors that are bullish (expect stocks to go up) vs. those that are bearish (expect stocks to go down). Since most advisors are wrong, it is considered a contrarian index. So the higher the percentage of bulls the more likely it is that we will see a drop in the markets.
Right now the bullish advisors are at 54.3% and the bears are at 22.3%. The difference between the bullish and bearish advisors is known as the “spread”. When the spread reaches 30% or more (as it is now) it indicates that we are very close to a move lower.
The last two major highs of 2012 (Sept & Feb) were both marked with bullish readings above 54%.
Does this mean that we sell all of our stocks and go running into the hills? Well it depends, the first thing we should do is put a stop to all new stock buys. It just doesn’t make sense to buy stocks up at these elevated levels.
The second thing is we should tighten up the stop loss points on all of our trading positions because reversals from these high readings are usually sudden and swift. If you are a long-term investor (10+ year time horizon) then you can comfortably ignore all of this market timing drivel!
But you should still hold off on any new buys here, even if you are a long term investor because if you are patient you should be able to buy this whole market 10%-15% cheaper later in the year.