Market Top? Please…

Posted by on Mar 31, 2014

As this is written, we haven’t yet completed the quarter. Right now, it looks as if the NASDAQ may end the quarter lower, due to traders having recently been rolling out of some of the, formerly, high-flying names in biotech, internet retailing and internet software and services. The S&P500 remains a few percent below the all-time high it set a couple weeks ago.

While they wait for a catalyst to cause them to move in a specific direction, looks to me as if our trader buddies in New York may simply be rotating their positions. They’re taking profits from the recent momentum trades and moving into those stocks they feel have lower valuations and so offer more upside over the nearer term. This could explain why banks and some of the mature tech stocks have been rising lately.

For the most part, however, the market – as represented by the S&P – has pretty much been in a trading range since February. Even though we’ve been in this range, daily activity has been fairly volatile. (Market volatility in itself is a normal part of a bull market and is also typical for markets trading at the upper end of their range.) The closeness of the quarter’s end can add to this, due to these rotational trades I mentioned.

Another factor for the lack of direction could be that there are a lot of investors of all types who are thinking that “things” just aren’t as good as the market makes them out to be right now. Talk of stock prices being “too high” – not sure what that means, other than perhaps the speaker has missed out on the move that caused the increases – that this bull market has run “too long and so must have to go down.” And, of course, let’s not forget concerns about the bubble bursting.

Understand that markets run on neither clocks nor calendars. Further, and according to data from last week’s GDP report, after-tax corporate profits continue to grow and are at record highs. These profits can support higher share prices from here. But, put that aside for now. Let’s examine why I believe we are likely not in bubble mode.

Market corrections

I saw two or three stories this past week from respected market types who are suggesting that a significant drop is coming. Conspicuous among all the stories was a lack of just when these might occur. I agree that significant drops will come – just not now. Market corrections, drops of 5% to 10%, have come in every year but one since 1980. (1) We had a drop of nearly 6% already this year and have bounced back from that. (2) Corrections are normal. Like spring rains; they come and go. Who knows? We may have another few before the year is over and certainly before this bull is ready to be put to pasture.

The thing about corrections is that they’re temporary and act to make the prices of a number of quality issues more attractive (cheaper). Therefore, neither are reasons for concern. And correction moves are not bubbles…

Don’t fear the bubble (yet)

I believe what people are really thinking when they say correction is crash, mega-drop, huge loss, etc. Their concern is for something way past a mere 5% or 10% drop. Please consider these thoughts if you share any of that.

In my experience, the more something gets talked about, the less it’s likely to happen. Markets daily reflect what all participants are reading, seeing, hearing and believing…to include fears. The mere fact that bubble talk is everywhere out there makes it real hard for any balloons to get too full of that hot air. Skepticism and fear will tend to keep the brakes on any big euphoric moves for now.

Speaking of euphoria, I find it quite humorous that the media is even suggesting that we’re close to such a market state. It looks to me as if many investors are just now creeping toward a positive market outlook. And, if investors are so euphoric, why then did Reuters last week report that these same investors pulled just under $1Billion from US stock funds the week before? That is definitely not market-top behavior.

One other point.

Neither today’s media nor most investors really have experience with market euphoria. The last time we had market-induced euphoria was in 1999-2000 and it was pretty crazy. The media was full of reasons why valuations weren’t too high – you can look it up. The next bull market that ran from 2002 into 2007 never had such an event. Its total return results were even below historical averages, so no party there. (3) People must see this current attitudinal move toward a more positive outlook as euphoria only because they’re comparing it with 2009. The amount of investor participation in the markets now is nowhere near the 1999-2000 levels.


Getting all caught up in the headlines du jour can increase your confusion and lead to expensive emotional responses. The best way to avoid that is to have a good long-term financial strategy in place and to stay with it. That will allow you to ride out any near-term choppiness…whatever the nominal cause.




16,323 1857 4155 $1,292 $19.80 $101.61 2.72% $7.71 – $7.78

(1) S&P/Dow Jones Indices

(2) Ibid.

(3) Ibid.

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