Stocks took a brief respite yesterday from their torrid advance, with the Dow Jones Industrial Average closing down 42 points. It’s becoming increasingly apparent, though, that we’re in the midst of a fairly unusual (but not unheard-of) market phenomenon, which I call “The Spike.”
Most often, a spiky move is associated with commodity markets. Oil treated us to a classic example in 2008. From February to July that year (only five months!), the price of crude soared nearly 70%, even though the global economy was clearly growing weaker.
It was an irrational run-up, as spikes typically are. But there was no contradicting it until the emotional energy of the crowd exhausted itself. Anybody who shorted oil at $100 or $110 or $120, and tried to hold on, got crushed as the price skyrocketed to $148.
Then, of course, the process went into reverse. As an equally violent surge of irrationality took over, Texas tea collapsed to $35 by December 2008.
Here in 2013, the U.S. stock market is showing telltale signs of spiky behavior. In less than five months, the headline indices have leaped almost twice as far as they would in a normal year. Prices rise monotonously, seldom pulling back for more than a day.
Yet the news background is slowly deteriorating. Far more companies are lowering earnings guidance than raising it — a worrisome trend that goes back more than two years. At some point, as the president of the San Francisco Fed reminded us yesterday, Bernanke’s crew will withdraw their ultra-easy monetary policy. When that happens, will the economy be able to stand on its own two feet?
Don’t ask such questions, please! Not while my friend Spike is in charge. As the mania grows, investors will (predictably) close their eyes to any contrary evidence, just as in 1929 or 1987.
Until, of course, the spike reaches its tip, and tips over.
I don’t think the tipping point will come for several more months, at least. On Wednesday, a whopping 536 Big Board stocks touched new 52-week highs. The market indices seldom make their final peak with such broad participation from the rank-and-file.
However, we must be extra vigilant. Equities are not cheap, regardless of what the hucksters say. And when the turn comes, it might not be easy to raise cash in a timely fashion.
As I recommended to my Profitable Investing subscribers: Stay with a conservative asset allocation (50% stocks, 50% fixed income). Buy pullbacks; don’t chase prices higher. Be patient, and maintain your sense of value.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.