Investment Truths

1. If you need to spend your money in a relatively short period of time it doesn’t belong in the stock market.

2. If you want to earn higher returns you’re going to have to take more risk.

3. If you want more stability you’re going to have to accept lower returns.

4. Any investment strategy with high expected returns should come with the expectation of losses.

5. The stock market goes up and down.

6. If you want to hedge against stock market risk the easiest thing to do is hold more cash.

7. Risk can change shape or form but it never really goes away.

8. There’s no such thing as a perfect portfolio, asset allocation or investment strategy.

9. No investor is right all the time.

10. No investment strategy can outperform at all times.

11. Almost any investor can outperform for a short period of time.

12. Size is the enemy of outperformance.

13. Brilliance doesn’t always translate into better investment results.

14. “I don’t know” is almost always the correct answer when someone asks you what’s going to happen in the markets.

15. Watching your friends get rich makes it difficult to stick with a sound investment plan.

16. If you invest in index funds you cannot outperform the market.

17. If you invest in active funds there’s a high probability you will underperform index funds.

18. If you are a buy and hold investor you will take part in all of the gains but you also take part in all of the losses.

19. For buy and hold to truly work you have to do both when markets are falling.

20. Proper diversification means always having to say you’re sorry about part of your portfolio.

21. Day trading is hard.

22. Outperforming the market is hard (but that doesn’t mean it’s impossible).

23. There is no signal known to man that can consistently get you out right before the market falls and get you back in right before it rises again.

24. Most backtests work better on a spreadsheet than in the real world because of competition, taxes, transaction costs and the fact that you can’t backtest your emotions.

25. Compound interest is amazing but it takes a really long time to work.

26. Investing based on what every billionaire hedge fund manager says is a great way to drive yourself insane.

27. It’s almost impossible to tell if you’re being disciplined or irrational by holding on when your investment strategy is underperforming.

28. Reasonable investment advice doesn’t really change all that much but most of the time people don’t want to hear reasonable investment advice.

29. The best investment process is the one that fits your personality enough to allow you to see it through any market environment.

30. Successful investing is more about behavior and temperament than IQ or education.

31. Stock-picking is more fun but asset allocation will have more to do with your overall performance.

32. Don’t be surprised when we have bear markets or recessions. Everything is cyclical.

33. You are not Warren Buffett.

34. The market doesn’t care how you feel about a stock or what price you paid for it.

35. The market doesn’t owe you high returns just because you need them.

36. As Yogi said :It's tough to make predictions, especially about the future.

Irrational Exuberance

Our esteemed and beloved past FED chair, Alan Greenspan, coined the term Irrational Exuberance describing investor’s excessive enthusiasm towards (at the time dot com) stocks, his way of hinting the markets were overvalued. Knowing the markets are driven by investor emotion, not fundamentals we know over or undervalued markets can stay that way for really long periods of time. Eventually when those emotions are driven from investors (or supply/demand dries up) the markets revert.

As such, investor sentiment is a valuable tool to watch.  It’s not the end all be all, rather another tool in the toolbox.  Since there is no perfect way to measure sentiment it’s easy to get wrong signals. This is another reason to reinforce the fact no indicator works all the time except. The only thing that is ALWAYS right is price and why we use indicators as confirmation tools (of price) only.. I have found that in general and with all sentiment gauges, extreme reading are really the only readings that can matter. With that in mind I wanted to show a couple of current sentiment gauges I follow and their current readings. The first is CNNMoney’s fear and greed index. Here is last Thursday’s index reading on the close

To put this into context, here are the readings over the past 3 years.

The fact we are at the highest level in the past 3 years should be concerning as stocks are extremely overextended short term. 

A second sentiment gauge which is the University of Michigan’s consumer sentiment index. Dana Lyons at the Lyon’s Scare combines the sentiment index readings alongside the SP500 index. As you can see this helps put into context the value of extreme readings and their relationship to stock prices. I have included this chart below.  The SP500 price is in the top pane while UofM sentiment index is at the bottom.

 No matter where I look, and however I attempt to rationalize current prices the fact is we are massively overbought and extended. In normal markets and depending upon your investing time frame, these conditions are typically times to lighten up and wait for a pullback to re-enter. Otherwise, the probabilities are you would likely be subjecting yourself to increased risk.  But so far this market has been anything but normal. With seasonality at our back and the fact there are still enough bears that have yet to drink the kook-aid, it looks as if  this market has room to move higher. That is only after we have had a chance to unwind the short term excessive irrational exuberance,

Spending More?

The Wealth Effect – The relationship between personal wealth and consumer spending. According to the wealth effect consumers have a tendency to spend a larger proportion of personal income as their wealth increases. The wealth effect was used to explain increases in consumer spending in the late 1990s when stock prices boomed.

Higher equity prices will boost consumer wealth and help increase confidence, which can spur spending. — Ben Bernanke, 2010.

Household Net Worth continues to rise and like most stock markets, made another new all-time high closing out Q317.

September 2017 Charts on the Move Video

With 3/4 of the year in the books, the US stock market is moving towards a very bullish seasonality period. If nuclear bombs and Washington tweet bombs cant bring it down are we setup for a year-end barnburner? My recap of September can be seen in the video link below.

https://youtu.be/YcmxMQ4ZC-g

Is Another Disappointment Ahead for the Bears?

In Monday’s post about the potential for a correction in the Nasdaq 100 index, I mentioned how some (not all) of the top components of that index don’t look well. In today’s post I wanted to show a few charts to illustrate what I was referring to.

The largest percentage holding in that index is Apple. As you can see, price has broken the 10 month uptrend line, formed a large complex topping pattern and just recently fallen below the important horizontal support. A push higher to regain that level would go a long way towards invalidating the breakdown. Barring that, a continuation of this breakdown targets the area where the 200 day moving average resides.

The 3rd largest component, Amazon looks almost as bad. Like Apple, price has broken below the 10 month uptrend support line and has formed a bigger (and more familiar) topping pattern. Some will immediately recognize the head and shoulders pattern which has not yet validated but is oh so close to doing so.  I have added 3 areas of potential support (T1, T2, T3) below where a pullback would likely find support (buyers) depending upon the strength of the decline.

Finally, the 4th largest component is Alphabet, Google’s parent company. With a similar look to Apple and Amazon but not quite as ominous as price still sits above its 10 month uptrend support line. Just barely though. GOOG, like the first two charts has formed a large topping pattern. If price were to gap lower below the horizontal support line, it will have formed an island top pointing to a decline of 90-100 points below the neckline, or about 20% below its double top high.

I know I keep repeating myself (its not because I am getting old but rather at some point it will matter) but this market has been unbelievably irrepressible and resilient making these warnings unnecessary. Normally investors would be sitting up and taking notice with concern when we see charts like those above, especially when they represent the supposed market leaders. Either way, it should be interesting over the next few weeks to see where the market goes in the short term, if anywhere. Will the bears once again be disappointed or will we see the first decent market correction we have seen in year?