Nobody can tell you when a 10% stock market pullback is imminent. That has not stopped many from issuing erroneous prognostications over the last 31 months. By the same token, no individual can predict when a correction will morph into a 20% bearish sell-off. Yet Marc Faber (â€Dr. Doomâ€) has routinely served up enormously frightful comments in a perpetually compliant media.
While it may be impossible to forecast with certainty, it is possible to increase one’s chances of success. One can always avoid a big loss by taking a big gain, small gain or small loss. Another might employ fundamental analysis to buy traditionally undervalued assets and/or to sell traditionally overvalued assets. Still others might simply let long-standing moving averages (a.k.a. “trendlinesâ€) dictate when to participate and when to stand down.
I use a wide variety of data (e.g., economic, historical, contrarian, geopolitical, fundamental, technical, etc.) when making asset purchase decisions for money management clients. In the end, though, when the markets decide that I am wrong about a particular selection, I cut bait so that I may successfully fish another day.
Looking at stocks at this moment in time, the evidence suggests an extraordinary disconnect. Vanguard Europe (VGK), SPDR Dow Jones Industrials (DIA) and SPDR High Yield Bond (JNK) all hit fresh 52-week highs on Thursday (5/8/2014). The breadth of riskier assets that are forging ahead might suggest to participants that a “risk-on†attitude will continue to be quite profitable.
In the same vein, however, iShares Investment Grade Bond (LQD), SPDR Dividend (SDY) as well as PowerShares Low Volatility (SPLV) are also hitting new 52-week peaks. Moreover, 10-year Treasury bond yields are near their lows of 2014 (2.60%) after falling from 3.03% at the end of 2013. Some signals make the waters even murkier. Leading trouble-makers of the 2007-2009 financial collapse have dropped below long-term trendlines, including SPDR KBW Bank (KBE) and SPDR S&P Homebuilders (XHB).
