Just about everyone on Wall Street has jumped aboard the bandwagon by now. Sure there are some that still think the market can go higher but the vast majority of investors are now expecting a major pullback. Welcome to what’s called a crowded trade.
Pundits are elbowing their way into the limelight on a daily basis sounding warnings of the imminent demise of the stock market. Traders are short and investors are selling as everyone eyes the exits. It appears all we need is someone to shout "fire" for the panic to begin. I wish it were that easy.
It has been over a month since I first warned that this quarter could be problematic for stocks. I was deliberately vague on exactly when this pullback would occur because a "topping out" process takes months to unfold. By the time many equity indexes react and the general public begins to register this process, many individual company stocks could be down 20-30 or even 50 percent.
Over the past few weeks I have brought your attention to several ominous signs that this process is occurring. Usually, small caps decline first and then mid-cap stocks with large-cap names the last to feel the brunt. This week I also noticed that the major decline in "momentum" stocks are starting to spread further afield. Some big names in the financial, industrial and health care sectors, among others, are getting hit hard.
However, remember that this is a process. All the doom and gloom sayers of last week, who were convinced that the correction had begun, backpedaled this week.
Folks, this is part of the process. It is not popular or pleasant, but it is extremely volatile.
As such, I would not be surprised if sometime next week, after a further decline, markets do a 180 and reclaim the highs. Clearly, we need this consolidation process. After all, the S&P 500 index is up 179 percent from its 2009 lows. Small-cap stocks, as represented by the Russell 2000 equity index, have become more expensive than at any time since 1995.
So let’s get down to the nuts and bolts. What should you do? You can sit back, ignore the drama, suffer some paper losses and come out even by sometime in the fourth quarter. Or you can raise some cash by selling some of your most aggressive investments. Wait for a reasonable decline, say 10-15 percent, and re-invest the money. Finally, if you think you are good enough: go to cash and buy back in at the lows. Good luck with that last bit of advice.
Sure, I will endeavor to tell you when that will occur but honestly, how can I accurately pick a bottom when I can’t pick a top? No one can and if someone claims they can, well, read their column or invest your money with them.
Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Reach him at 1-888-232-6072 or e-mail him at Bill@afewdollarsmore.com.