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Goo-Goo For The Stock Market

When markets, and I mean pretty much any market, starts to get exuberant and people start getting too excited about any one thing in particular, I am concerned. I remember my dad showing me an article in early 2006 entitled: “Goo Goo For Real Estate” on the front page of a major newspaper. The first thing he says to me is that we are now in a bubble. It was only months later that we in fact experienced an enormous bubble burst that absolutely destroyed the real estate market and triggered many other financial disasters.

This real estate bubble was propelled with low interest rates and the firmly held notion that real estate would continue to steadily climb. People took on investments they could not afford because they were banking on a rising market that would back their debt. Without going too much further into detail, the rest in history…

We are starting to get in that asset appreciation mindset again…

The stock market as well as real estate has seen a rebound since its crash a few years ago. The real estate market has not come back to its 2006 highs, which is actually a good thing considering the fact that wages are not increasing and the capability to afford is only artificially sustained.

In regards to Dow 16,000/S&P 1,800 and the price movement we are seeing here, now would be a good time for a healthy correction. The price points are psychologically pretty substantial in the minds of investors and everyone wants to know what to do from here.

In my honest assessment, expect a correction from here. The reality is that if we don’t see a 10-15% correction in these indices, we will be dealing with an ever expanding inflating bubble that will be increasingly dangerous the longer it progresses without releasing some air.

Why do I think there will be a correction?

Main Street has been getting more bullish on the market now than it has been in a while. Stock-based mutual funds have brought in more cash in 2013 than any other year from 2004-2012. Could it mean that the dumb money is calling the top of the market? What does it mean when the masses are buying an asset just because it’s going up? You tell me…

The Dow Jones has now set its 38th record high in 2013. It might be worth noting that in 2007, the Dow had 34 record highs before there was a severe meltdown. It isn’t an indicator that everyone should base all of their decisions on, but definitely something worth noting.

Portfolio managers throughout the year have seen their stock percentage rise pretty significantly. If they are wanting to have their clients money allocated 60% in stocks, 20% in bonds, and 20% elsewhere; now that that 60% portion has probably grown and overtaken an even larger percentage over the portfolio, they will need to sell some of that portion. This is extremely common and portfolio managers around the world will put a strain on the immediate continual growth of stocks.

Corrections are necessary when dealing with a “fundamentally sound growing market.”

For those looking to maximize immediate returns, you might looking into taking profits now and then wait for a correction to get back in. Even if stocks continue to rally and the S&P sees 1,900 and then only comes back to 1,700 or even 1,800, at least you had a correction to place your weight on before you jump back on for future growth. For those who have many years to invest, history shows that time will give the returns you need to overcome any short-term volatility and therefore should not be too concerned about what will happen in the shorter-term.

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Thank you for your time,

Kenneth Ameduri
Chief Editor of CrushTheStreet.com
 

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