Don’t Let ’em Scare You Out Of Your Stocks – Seeking Alpha

Don’t Let ’em Scare You Out Of Your Stocks – Seeking Alpha

Russel 2000 December 7, 2020

– No question … The market is overextended

– Well-known investor sentiment surveys are flashing red

– Calls for caution become routine

– How should you react?

– Best advice… maintain the long view… the secular bull continues

The market is overextended

There is no question about this. During the month of November, the Dow Industrials, S&P 500, Nasdaq and Russell 2000 all made new all-time highs. For the month the S&P, Nasdaq and Russell 2000 were up 12%, 13.2% and 19% respectively. We are textbook overbought.

Investor sentiment surveys are flashing red

This week’s survey from Investors Intelligence reported that approximately 64+% of the market letter writers they surveyed were bullish. According to one source, the last time the percent bullish was this high was in January 2018 (not a good time to be long stocks in the short term). The American Association of Individual Investor survey reported out this week the following:

– Bullish 49.1% up 1.8% from previous week (38% hist. avg.)

– Bearish 22.7% down 4.8% from previous week (30.5% hist. avg.)

– Neutral 28.3% up 3.0% from the previous week (31.5% hist. avg.)

Obviously, these contrary sentiment indicators are sending a strong short-term warning. Importantly, it would be normal to expect a little bit of air to be let out of this balloon. The knowledgeable investor will not be alarmed about a sharp, severe correction when it comes.

One final point as it pertains to these well-known sentiment indicators, they are surveys of engaged investors, not the vast majority of people who may or may not have money in the market, people who may have sold in panic in 2008/2009 or, more recently, last spring. There are people who have been underinvested in equities for years for fear that the next market crash was just around the corner… many people who just hate stocks, have totally eschewed them, because of what happened to them in the past.

This is textbook. Secular bull markets begin in periods of fear and panic, periods where people are totally disillusioned about investing in stocks. They end in periods where the vast majority of people think the market is the only game in town. We are nowhere near that level of enthusiasm. Think the tech bubble/Y2K.

Calls for caution proliferate

The media and pundits have seized on these new highs as a reason for caution. My sense is that rates (the 10-year @.973% pushing 1%) and the Georgia senatorial election will become focal points of media warnings.

Barron’s “Heard on the Street” column picked up on the Georgia issue this week.

“One more thing for the bulls to ponder is the key Georgia Senate runoff elections in January. Raymond James’ chief strategist Larry Adam notes that the betting odds on PredictIt of the GOP retaining control of the Senate have slipped to 70% from 83% a month ago. A Democratic win in Georgia could pose a near-term headwind for equities, given their 9.1% advance since Election Day, since the incoming administration’s tax-hike proposals could lower 2021 earnings by about 10%, he adds.” (you will need a WSJ or Barron’s subscription to view the entire article )

To many the current market is dangerously, irrationally overvalued (IMHO because of the heavy tech weighting in the S&P 500). Recall the sage words of John Maynard Keynes:

The Market Can Remain Irrational Longer Than You Can Remain Solvent

Remember Alan Greenspan’s “Irrational Exuberance” speech of December 5, 1996. The S&P 500 stood at 743.25. By March of 2000, it had risen to a then all-time high of 1550. BTW, the world was in love with stocks back then. It has been out of love with equities for the past twenty years (especially the last 10 years) during a time where the market has more than doubled again. There continues to exist much distrust of stocks.

How should you react?

My experience tells me the market has the potential to head a lot higher over the next few years. There is plenty of dry powder on the sidelines as investors have been selling stocks in favor of “safe” fixed income investments (at risk during periods of rising interest rates) or, for ultimate safety and flexibility, at no return in money market or bank accounts. Recent stimulus and stimulus-to-come plus a burgeoning recovery in the far East should provide significant fuel for the economy as we move forward.

Having said this, much depends on your own tolerance for risk, financial situation and personal comfort. If you are uncomfortable with the current level of your equity exposure, get comfortable, raise some cash. There certainly could be interesting opportunities arising down the road. The path upward, as it was in the 1990s will not be straight or without scary corrections.

If you are on the outside looking in, or would like to increase your equity exposure, consider looking at the market roads less traveled over the past few years… exchange traded funds or index exposure to the Russell 2000 or mid-cap growth and value stocks… beneficiaries of the “re-open” trade post Covid19.

My Advice

The media works to get your attention, providing scary headlines with zero in the way of perspective to guide investors. They know the prospect of financial loss is scary stuff and, for sure, that bad news sells.

Don’t let ’em scare you out of your stocks.

What is your take?

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.