Eric Fry, reporting from Laguna Beach, California...
"Sketchy"... That's how a California surfer would describe conditions in the stock market right now... assuming, that is, that the surfer knew what a stock market was.
A helpful column at Real Life English titled "How to Speak Like a Californian," defines "Sketchy" as "Something that is dangerous, stupid, or just doesn't feel right. When used to refer to a person it can also mean they are untrustworthy, creepy, or just someone you don't feel comfortable being around."
The stock market may not feel downright "dangerous" or "stupid" at the moment. On the other hand, it "just doesn't feel right." It feels kinda... well... sketchy.
The recent rockiness in the stock market, while uncomfortable, should be no big surprise to regular readers of The Daily Grind. We began one of our late-February issues by remarking, "'If it's obvious,' an old Wall Street adage goes, 'it's obviously wrong.' U.S. stocks have become an 'obvious' winning bet - a fact that could inspire forward-looking investors to wonder if that winning bet is close to becoming obviously wrong."
We concluded that issue by observing, "A wildly popular stock market that has nearly tripled in five years and is trading at record highs is not necessarily a 'sell.' But it might be less of a 'buy,' at least to the kinds of folks who remember that stocks also fall."
Two weeks later, we focused our skeptical eye on the frothy biotech sector and pointed out that "the Nasdaq Biotech Index's torrid run from record high to record high seems to rely more on faith than fact."
We presented the chart below to illustrate that "the Nasdaq Biotech Index's earnings are not hitting record highs. In fact, they are not even hitting a number with a plus sign in front of it. This red-hot stock market sector lost money during the last 12 months!  "Mr. Market does not always rely on cold, hard facts," we concluded. "For long periods of time, he is much more a romantic than an accountant. And he is clearly in love with biotech stocks at the moment, no matter how pricey their valuation... But maybe one day he'll have a change of heart... maybe one day soon."
The Nasdaq Biotech Index has tumbled 15% since those words landed in your inbox.
Sketchy!
Obviously, stocks do not always go up, even though it feels that way sometimes... especially after a banner year like 2013! But then, along comes a 2014 to remind us that stocks can also fall... especially stocks in red-hot stock market sectors like biotech.
Moments like these are very uncomfortable. No one likes losing money, especially when they feel they might be on the verge of losing even more money. And so moments like these trigger a fight or flight instinct in most investors.
The "fighters" say to themselves, "Hey, I'm in this for the long haul. So I'm not going to let the stock market scare me. In fact, I'm going to buy more stocks in the midst of the current weakness."
We have no quarrel with that approach, but we sympathize more with the "flighters" - the folks who say to themselves, "Hey, these last few years have been a very nice ride. So maybe I'll cash in a few chips and breathe easier for a while."
The "flighters" still have to do something with their capital, of course... Even if that something is putting the money in a zero-yielding bank account.
In other words, lightening up on stocks does not mean doing nothing; it just means doing something else. For example, our colleague Steve McDonald is advising his subscribers to allocate some of their capital to a strategy that operates outside the stock market. You can check it out here:
Make Money Even When Stocks Are Falling.
Steve joins us today with his first-ever guest appearance in The Daily Grind. In the two-minute video below (click the image to play), he shares a few reasons why this stock market has him a bit concerned - i.e. "sketched out."
Preparing for a Stock Market Sell-off By Steve McDonald
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| This week's 2 Minute comes in the form of a warning about some stocks. A recent Barron's article focused on a trend in stock picking that should be a big red flag for all investors... especially the retired.
The article cited 163 companies being recommended by analysts that have already exceeded their target price. That means the stocks are still "Buys," but have moved past the target price the analysts listed when they recommended them.
This is ridiculous.
Chipotle Grill (NYSE: CMG) would have to drop 2% to get back to its target, but 13 of 27 have it listed as a "Buy."
Adobe Systems (Nasdaq: ADBE) is expected to drop in the next year, but it gets 16 "Buy" recommendations and just one "Sell."
TripAdvisor (Nasdaq: TRIP) is expecting a 14% drop in share price, but only two of 26 have sells on it.
That's 37 times earnings for Chipotle, 33 times for Adobe and 39 times for TripAdvisor.
Don't get me wrong. I am not in the crystal ball business. I have no more ability to call the top or bottom of the market than anyone else. But come on. This has gone beyond ridiculous.
Margin levels - how much people borrow to buy stocks - are back to 2008 levels. That is always a precursor to a sell-off.
And it is hard to find anything worth owning that isn't at and over its 52-week high.
Is this market overpriced? No one seems to think so. Everything I hear is that it is fairly priced.
Well, fairly priced for some is a lot different from fairly priced for a retired person or somebody who is planning to retire soon. For these folks, this market is a minefield just waiting to take your legs off.
There are buys out there, but you had better be very careful about where you step.
As I said last week, if you need to put money to work: - Look for the out-of-favor industries that have big potential down the road.
- Stick with big names with a yield, if possible.
- Leave the risk for those who haven't learned the importance of time and bargain hunting.
- And don't forget about big-name corporate bonds. They avoid most of the stock market's volatility and, if you keep your maturities short, can return above-average returns despite what happens to interest rates.
Most of us have no way of recovering losses. So use all the tools available to protect your money.
Good investing,
Steve McDonald
Bond Strategist
The Oxford Club | |
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