(photo by Aidan Hancock on Unsplash)
I have already stated in previous posts, my view is the stock market is overpriced and I’m waiting for a stock market pull-back. However, I want to be clear that I am in the minority. There are very few bears left in this bull market.
Individual investors continue to “buy the dip” after the rare small drops in the market. The Federal Reserve continues to pour money into the market, feeling the need to help hold the market up, even while stating over-and-over that the economy is in great shape. And frankly, there is no where else to invest money at this time. With extremely low interest rates from savings accounts, CDs, and bonds, interest income can be found no where. It makes sense that the professional trading firms continue to invest their client’s money in the market.
Had I stuck to the mantra, “the trend is your friend”, I’d be in better shape. We have been in a bull market for years now, with an additional massive surge to the upside during the pandemic. Many professional traders recommend trading what’s in front of you, not what you think will happen. And that advice has held up well.
Perhaps I’m a little skittish at these high levels because I lived through the tech bubble of 1999-2000 that started with soaring tech names and ended with a huge drop. There is a saying that the market goes up like an escalator (slow and steady), and down like an elevator (fast and hard). However, during the 1999-2000 technology stock bubble and other times, like last year, it felt like the opposite, with a massive elevator up.
I just saw a twitter post this morning by Carl Quintanilla (CNBC, NBC) quoting Goldman Sachs, the big investment bank: “We raise our S&P 500 year-end 2021 price target to 4700 (from 4300) and our 2022 target to 4900 (from 4600). The combination of higher-than-expected S&P 500 earnings and lower-than-expected interest rates drive our upgraded price targets…” [Kostin]
Many companies that have reported earnings for the most recent quarter have reflected fantastic financial results. I would argue that these great earnings reports are already factored into the market. Tech companies like Apple reported an all-time great latest quarterly earnings, yet their stock dipped with news that they foresee a slowdown next quarter due to the Covid variant picking up steam. On the other hand, Amazon had less than stellar numbers, which saw their stock price drop.
There are also plenty of companies that have seen their stock prices come down. While the overall market indexes (S&P, Nasdaq, Dow) continue to flirt with all-time highs, the reality is that all companies are not created equal in these market indexes. Big tech companies, for example, are weighted more heavily in these indexes than smaller companies. In effect, for most of this year, big name tech stocks (and others) have been carrying the S&P and Nasdaq indexes, even though many other company stock prices are down.
The Russell index which represents smaller companies is one index that has been in a downtrend recently. To quote an email I received this morning from tastytrade: “With all the attention given to the rallies in SPY, QQQ, and even DIA, it may be surprising to know that IWM is the same price it was six months ago. On Feb 4, IWM closed at 218.62. Yesterday, it closed at 218.11.
What am I doing in my own portfolio? First, I have cash on hand to buy stocks after a pull-back occurs (whenever that will be). Second, when I uncover a stock that looks like a good entry point for a long position based on chart technicals, I’m in the trade short-term. Either the stock goes up and I close out for a profit, or I close the trade for a small loss. Third, and the majority of my strategies, I utilize stock options (not for all investors) to enter mostly short positions.
To conclude, the stock market is at all-time highs and continues it’s upward trend, even today. No one knows which way the market will go in the future. It may continue up for a while. However, based on the economic data that I see, I am taking a contrarian stance.
I remember my 401K taking a huge hit in that 1999-2000 dip! Do you find that there are more “average” people are using services like the RobinHood app to invest their own savings instead of the big corps?
Hi Angela. Thanks for reading and commenting. I get the sense that the Covid lockdown had something to do with more individuals (especially millennials) jumping into trading on their own through various trading platforms, of which RobinHood is one. Also, prior to Covid, all brokerages stopped charging fees to individual clients when buying stocks. It use to cost around $10 per transaction. Now it costs just a few cents. So now, I can buy stock in small increments to make a small profit, which would not have been feasible in the past with the $10 fee. A lot of people are not comfortable investing their own money, especially if they do not have time to follow the markets. Using a full service broker is definitely an option. A few years ago, I met with a few brokerages who wanted to invest 100% of my money at one time. I was not comfortable with that, so I decided to do it myself. My results to date are not great, but I have learned a lot that will help me going forward. I wish you much financial success.
I stuck it out during the 1999-2000 dip and while I lost a big it bounced back. After that I put some in a variable annuity and now I’m getting a good check every year plus the account still has $$ for the beneficiary. What are your thoughts of the 8 to 1 split that General Electric just had?
Hi Martha, thanks for commenting. Stock splits and reverse stock splits have no bearing on the company’s earnings. The total value of your investment does not change. The pre-adjusted stock split price of GE was $12.69. The GE stock split was actually a 1-8 REVERSE stock split. That means, for every 8 shares a shareholder owned at $12.69, they now own 1 share at $101.52 ($12.69 times 8). While the GE stock price has gone up recently (pre-split), it had been down for a long time. Even after it’s recent stock price uptrend, it was still only trading at $12.69 pre-reverse split. My take is that GE management wanted their stock price to be be ‘perceived’ as being higher than it really was. So they did the reverse stock split. Instead of the stock price being $12.69, it became $101.52 with less shares outstanding. I would not be a buyer of GE simply because they did the reverse stock split. I would base my decision on the long-term growth outlook of both GE stock and their industry as a whole.
Sounds like you have a good plan for your investments. And it is probably good to be cautious. I know I would be. I do hope to be able to invest someday, though.
Thanks Jeanine.
I like saving and investing and hate trying to time markets.Its a recipe for headache.Your post was an interesting read.
Amrita, thanks for reading and commenting. I agree, timing markets is one big headache. That’s what I have, lol.