If there was a stock to define today’s investing mentality, the ticker might spell FOMO — “fear of missing out.” But for investors wishing to ensure a happier New Year, hedging that enthusiasm with the SPDR S&P 500 ETF (NYSEARCA:SPY) is worth considering now.
It seems that nothing can bring the broader market down. Certainly not a White House that’s come under massive pressure this year. What’s more, good news, such as a recent phase one trade deal and the Fed’s accommodating about-face, have only reinforced 2019’s incredible bullish run after last year’s seasonal Q4 derailing. In fact, stocks are on track to enjoy their best gains since 1997.
No single index better exemplifies today’s FOMO than large-capitalization, broad-based exchange-traded fund SPY. Shares of SPY are up 29% this year led by household mega-caps Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) and gains of 84% and 57%, respectively.
Under the surface though, there are growing signs the bull market is on its last legs and investors shouldn’t be partying like its 1999. One well-documented indication SPY is due for a major setback is 2019’s yield-curve inversion, which triggered earlier this year. Historically, this event has preceded the last seven consecutive economic recessions. It has also signaled in nine of the last 12 recessions. To say the least it has a solid track record.
Despite this signal’s consistency bulls might argue time is still on their side. The fact is the market on average lags putting together a major top by about 18 months. Thus, relative to August’s inversion there could still be a multi-month rally in the works. However, the lead time is extremely inconsistent. It could come much quicker. Further, the average gain for the market following an inversion signal is less than 19%. Since August SPY is already up nearly 14%.
In our estimation, in of itself, the yield curve is enough to give pause and think defensively. But the canary in the coalmine doesn’t end there either.
Going into 2020 ambitious earnings expectations calling for 10% growth in SPY are prone to downward revisions. And even if large-cap companies affirmed current Street estimates, today’s 19x P/E multiple is historically rich.
Worried? There’s still more to warrant acting defensively.
Contrarian-minded investors need look no further than the S&P 500 equity put/call ratio. The indicator recently hit its most confident extreme since 2014. That’s not good news. Coupled with SPY’s grinding, confident price gains the past couple months and historically low implied volatility readings, taking protective portfolio action in SPY as FOMO lurks in the background of today’s digital ticker tape makes sense.
SPY Monthly Chart
Source: Charts by TradingView
Given the existing bull market in S&P 500 stocks prior to 2019, the commitment to be proactive is even more approachable right now. The point is, even the best stocks and markets correct. Worse yet, there are also more significant and prolonged periods embodied by negative returns known as bear markets.
The last painful bear market ended more than a decade ago. Technically, 2018’s fourth-quarter correction signaled the start of this kind of cycle as the index fell a hair over 20%. But that false-negative phase was over before it even started.
Now, and with 2019’s rebound to all-time-highs, as well as SPY’s near 400% return since 2009, treating today’s friendly trend-in-motion as one that’s just getting started opens one up to increased and significant risk. Treat today’s bull market like it’s 1999 before the party stops and consider allocating short exposure in SPY or options contracts against your portfolio.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.