If there was a stock to define todayÃ¢ÂÂs investing mentality, the ticker might spell FOMO Ã¢ÂÂ Ã¢ÂÂfear of missing out.Ã¢ÂÂ But for investors wishing to ensure a happier New Year, hedging that enthusiasm with the SPDR S&P 500 ETF (NYSEARCA:) is worth considering now.
It seems that nothing can bring the broader market down. Certainly not a White House thatÃ¢ÂÂs come under massive pressure this year. WhatÃ¢ÂÂs more, good news, such as a recent phase one trade deal and the FedÃ¢ÂÂs accommodating about-face, have only reinforced 2019Ã¢ÂÂs incredible bullish run after last yearÃ¢ÂÂs seasonal Q4 derailing. In fact, stocks are on track to enjoy their best gains since 1997.
No single index better exemplifies todayÃ¢ÂÂs FOMO than large-capitalization, broad-based exchange-traded fund SPY. Shares of SPY are up 29% this year led by household mega-caps Apple (NASDAQ:) and Microsoft (NASDAQ:) and gains of 84% and 57%, respectively.
Under the surface though, there are growing signs the bull market is on its last legs and investors shouldnÃ¢ÂÂt be partying like its 1999. One well-documented indication SPY is due for a major setback is 2019Ã¢ÂÂs , which triggered earlier this year. Historically, this event has preceded the last seven consecutive economic recessions. It has also signaled in nine of the last 12 recessions. To say the least it has a solid track record.
Despite this signalÃ¢ÂÂs consistency bulls might argue time is still on their side. The fact is the market on average lags putting together a major top by about 18 months. Thus, relative to AugustÃ¢ÂÂs inversion there could still be a multi-month rally in the works. However, the lead time is extremely inconsistent. It could come much quicker. Further, the average gain for the market following an inversion signal is less than 19%. Since August SPY is already up nearly 14%.
In our estimation, in of itself, the yield curve is enough to give pause and think defensively. But either.
Going into 2020 ambitious earnings expectations calling for 10% growth in SPY are prone to downward revisions. And even if large-cap companies affirmed current Street estimates, todayÃ¢ÂÂs 19x P/E multiple is historically rich.
Worried? ThereÃ¢ÂÂs still more to warrant acting defensively.
Contrarian-minded investors need look no further than the S&P 500 equity put/call ratio. The indicator recently hit its most confident extreme since 2014. ThatÃ¢ÂÂs not good news. Coupled with SPYÃ¢ÂÂs grinding, confident price gains the past couple months and historically low implied volatility readings, taking protective portfolio action in SPY as FOMO lurks in the background of todayÃ¢ÂÂs digital ticker tape makes sense.
SPY Monthly Chart
Given the existing bull market in S&P 500 stocks prior to 2019, the commitment to be proactive is even more approachable right now. The point is, even the best stocks and markets correct. Worse yet, there are also more significant and prolonged periods embodied by negative returns known as bear markets.
The last painful bear market ended more than a decade ago. Technically, 2018Ã¢ÂÂs fourth-quarter correction signaled the start of this kind of cycle as the index fell a hair over 20%. But that false-negative phase was over before it even started.
Now, and with 2019Ã¢ÂÂs rebound to all-time-highs, as well as SPYÃ¢ÂÂs near 400% return since 2009, treating todayÃ¢ÂÂs friendly trend-in-motion as one thatÃ¢ÂÂs just getting started opens one up to increased and significant risk. Treat todayÃ¢ÂÂs bull market like itÃ¢ÂÂs 1999 before the party stops and consider allocating short exposure in SPY or options contracts against your portfolio.
Disclosure: Investment accounts under Christopher TylerÃ¢ÂÂs management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher TylerÃ¢ÂÂs observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on TwitterÃÂ ÃÂ andÃÂ StockTwits.
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