Not a subscriber? Click here to learn
more.
|
| Home | About Us | Resources | Archive | Free Reports | Market Window |
Bullish or Bearish, Here's What You Should Be Doing TodayBy
Wednesday, January 13, 2016
Humans love stories.
They like to turn complex ideas into simple stories.
The stock market is a perfect example. It doesn't actually tell stories... It's just a place where millions of investors go every day to buy and sell shares of businesses. But humans can't help but think about the market as if it were telling them a story with every tick up or down.
Every market participant tells himself a bullish, bearish, or neutral story. Add them all up, and you get one big "mega story." That mega story is what we call "the prevailing bias" (a term I stole from legendary investor George Soros and redefined for my own purposes).
Over the past couple years, the prevailing bias has been bullish. That seems to be changing...
Last year was a minefield that led to the stock market's worst performance since 2008 (which we largely avoided). But many stocks are still expensive, and the market is still way up over the past seven years.
There's more fear in the market today than there was a year ago. Stocks are cheaper, and there are far fewer bullish investors. But that doesn't mean there are a lot more bearish investors. Instead, the majority of investors are neutral about the stock market...
The American Association of Individual Investors (AAII) Sentiment Survey showed 51.7% of investors surveyed were bullish at the start of 2015 versus just 25.1% bullish today.
It showed 22.3% of investors were bearish at the start of 2015 versus 23.6% bearish today.
And it showed 51.3% of survey participants are neutral on stocks now, neither bullish nor bearish, versus just 32.7% neutral a year ago.
Investors looking in their rearview mirror at last summer's 13% plunge in the S&P 500 feel more scared than they did last year. But because the market has recovered somewhat in the last couple months, it has taken the edge off their fear.
Here's where we stand today...
Many stocks are still unattractive... even though investors are less bullish and last year's poor market performance made some stocks relatively more attractive than they were a year ago.
The prevailing bias is weakening. The combination of a weakening prevailing bias and still-expensive stocks means you have to be careful.
Some people like to be careful by selling short the shares of weak companies. Others prefer to hedge their portfolios with put options, like buying insurance against a market drop. But there's a much easier way to reduce risk in an equity portfolio...
By far the easiest, safest, most certain way to reduce risk in an equity portfolio is to hold plenty of cash. As I showed you in this DailyWealth essay, the optionality of cash isn't priced in a large, liquid market. There aren't millions of people trading it back and forth millions of times a day. It has no expiration date. And you aren't locked into buying or selling at a particular time.
Right now the market is telling us to be careful... Making sure you have plenty of cash on hand is the best way to prepare.
Good investing,
Dan Ferris
Further Reading:
"No one talks about how to manage your cash," Dr. David Eifrig says... "But you need to give some thought to where you put it." Learn the best places to park your cash in today's market right here: The Ultimate Cash-Management Guide.
Last year, Steve told readers that there's little downside in holding extra cash outside of the bank. "The bottom line here is you ought to hold way more cash than you think," he says. "Think of the number you believe is right... and then consider ADDING A ZERO TO IT!" Read the full story here: How Much Cash Should You Hold?
Market NotesLONG BUST CONTINUES FOR THIS SECTOR A classic "boom and bust" sector is stuck in a long downtrend...
Today's chart shows the past three years of trading in the PowerShares DB Agriculture Fund (DBA). This fund is a "one-click" way to own a diversified basket of agricultural commodities like corn, wheat, soybeans, cattle, hogs, sugar, and coffee.
Prices for these products depend on a variety of "slow" seasonal factors, ranging from the weather to how much seed farmers plant. So once a trend gets going in the "ag" complex, it tends to run for many months, giving it its "boom and bust" nature.
As you can see below, DBA saw an uptick in the beginning of 2014, rising 20%-plus from January to May. But it has been stuck in a downtrend ever since. Shares are down 15% over the past six months alone. The trend can definitely reverse, but for now the market is telling us to be cautious of this sector.
 |
Recent Articles
|
