There is no denying the resilience of this stock market over the last year. Every modest pullback is bought in earnest as investors throw caution to the wind and demonstrate a voracious appetite for stocks. Despite the threats of government gridlock, overseas conflict, plunging commodity prices, and an uncertain central bank future, traders have continued to reap the rewards of rising equity prices.
It may not seem logical considering the odds that are stacked against an extension of this rally. However, the stock market is rarely a logical animal. Instead, it is a beast that climbs a wall of worry despite all compelling evidence to the contrary. Don’t ever say that the stock market can’t go higher, because it can and it will when you least expect it.
This weekend will mark the one year anniversary since the SPDR S&P 500 ETF (SPY) last fell below its 200-day moving average. The trend has most certainly been our friend over the last 52-weeks. You would have to go back two years on the chart to see this bellwether index having spent more than a week below its long-term moving average.
It is moves like this that spur the use of buzzwords such as “bubble” and “frothy”.
Another interesting fact that was brought to my attention by Ryan Detrick at Schaeffer’s Investment Research is the latest Investors Intelligence poll now marks the percentage of bears at just 15.5%. According to their research, this is the lowest reading since March of 1987 which indicates that the ursine crowd is now in deep hibernation.
For sentiment purposes, a low number of bears typically means that we are close to a market peak. Simply put, if everyone thinks that stocks are going up, there is no one left to buy.
However, Detrick is quick to point out in his analysis that the low percentage can persist for quite some time and is nowhere near the all-time historical low. It is a statistic that is worth noting, but hardly an iron-clad reason to go to cash at this point in time. Trying to time a market top can be an exercise in futility.
Other recent market observations that are worth mentioning include the shift in momentum from the iShares Russell 2000 ETF (IWM) to the SPDR Dow Jones Industrial Average ETF (DIA). Small cap stocks have been leading the majority of the year but have surrendered momentum to larger blue-chip names. That may be a sign that we are seeing profit taking in high beta areas and a rotation into more stalwart defensive names.
At the end of the day we are still seeing record inflows into equity related ETF and mutual funds as performance chasing investors throw in the towel and opt for risk over safety. These moves may ultimately prove to be ill-timed, but are a symptom of the typical psychological action that we see through every peak in the market cycle. Greed and fear are powerful motivators.
My recommendation for your portfolio is to stay balanced and continue to ride the trend as long as it is intact. I am not seeing a pressing need to get more aggressive or defensive at this time until we see a breakout or breakdown in the recent consolidation. A move back below the 50-day moving average would be a warning sign for stocks and give us an indication that we are seeing a confirmation of downside risk.
Another key indicator to watch will be interest rates as we make our way through the transition of the Fed Chairman role. Both stocks and bonds are likely to get volatile in the wake of monetary policy changes. That is why it is key to have a solid risk management plan in place to lock in gains when the tide turns and prepare for new opportunities.
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David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management.
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