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How the Market Works

“Extra Cautious” Is Not Good: How the Market Works

Posted by kdadmin on March 31st, 2016.

“Extra Cautious” Is Not Good:  How the Market Works

Don’t do it.

You know what I’m talking about. Don’t go out in the market and buy a lot of stocks just because the Federal Reserve wussed out and didn’t raise interest rates.

In case you missed it …

“Extra Cautious” is Not Good

When the Federal Reserve decides to be “extra cautious” with monetary policy, it is NOT a good thing. Think about it, what happened the last time someone told you to be extra cautious? Was your first impulse to go do the most aggressive thing possible?

Think of it this way. It’s March, and the Fed is actually saying, “Hey, the ice is thin.” But the stock market buyers are saying, “Hey, let’s drive our huge trucks out on the ice.” How do you think this is going to end?

If the Federal Reserve thinks that a 0.25% raise in the federal funds rate is going to be a problem in the economy,then maybe the economy is not in such good shape after all. Anyone think of that?

And while there may be strong points in the U.S. economy, the foreign markets are getting pounded. Negative interest rates, huge stimuli, and escalating terrorism are rocking global economies. Economies that buy lots of stuff that the US sells. So, if our customers are taking it in the shorts, eventually that could pollute our market stability.

But this is nothing new. This is global economics. This is how the market works.

Could History Repeat Itself?

Look at the chart above. Courtesy of my brand new, first day it was available, Apple iPad Pro 9.7 and Pencil. (Thanks goes to my artist client, Katy, who told me that I should draw more pictures and use more charts when I wrote these articles.) She may have created a monster …

Look at what I’ve circled in the chart. (SPY is a mutual fund (ETF) that tracks the S&P 500. AGG is a mutual fund (ETF) that tracks the bond market.) The last nine months of SPY (June 2015 – March 2016) looks a lot like the end of 2007. A couple of peaks, a stalled market, a few significant contractions. While we all know what happened after that, look at the scale of the “contractions” we’ve experience in the last year versus the size in 2007. The recent contractions are much more severe. Usually over 10% each time. This is significant as it could signal a bigger negative swing in the future.

Of course, our financial markets are in a much, Much, MUCH better place than they were in late 2007, but the stock market is still significantly over priced. So, a financial market catastrophe is probably unlikely. But unless we’re talking about a restrictive investment structure, like a 529 plan or certain retirement plans, I wouldn’t want any of my, or my clients’ money, invested in the stock market. And even then, if the restrictions gave me a 6 month window, I think I’d still be out.

While SPY is going through all these gyrations, notice how AGG has fared? Steady as she goes. This is why I’ve been heavily invested in bonds since May of last year.

Look at the dark blue slanted lines. The recent stock market trend is down. And the stock market trend has been down for longer than we’ve seen it since 2007. Stocks are over priced, and to add insult to injury, not only has the Fed stopped pumping money into the economy, but it has begun to raise interest rates. Even by the anemic rate raise pace, it’s still a raise. It still takes a significant amount of “free money” out of the economy.

Keep Your Eye on the Ball

Remember how we’ve made money this year? Remember, “How Our Clients Made Money During the Worst January in History,” with far less risk?

We did it by preying on the sick and the weak.

The sick and the weak are those who have given into greed or fear, and overbought or over sold the market. We have waited until they drove it up or down. Then we bought an investment that profited when their sickness kicked in, driving prices against them, while we laughed all the way to the bank.

It’s happening again. Right in time for second quarter earnings season. Which, by the way, starts with Alcoa on April 11th. Hopefully, all the other investors will get spring fever, drive up the price of SPY, so we can buy our bearish stake for a little less, and giggle when the stock market gets torched. Bwahahahahahha!

I mean, “Excellent …”

If you’re a client, you’ll learn more about how to do this later …

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