When my wife and I were preparing to be married, we wanted so badly to have the wedding outside. We made all the plans, had the gazebo rented out and were ready to go. That is, until the weather report came out that week. Early in the week, there was a 10% chance of rain (the wedding was on a Saturday). By mid week, the probability rose to 20%, and the number only seemed to climb. We decided to make it a game-time decision. Saturday morning, there was a 40% chance of rain with the highest probability starting toward the end of our ceremony.
So what did we do? We decided to play it safe and moved the entire wedding inside to the same location we were holding our reception. Did it actually end up raining that day? Nope. But that’s how it goes, doesn’t it?
This decision-making process that my bride and I went through with our wedding is a lot like the decision-making process we’re faced with in the stock market today.
We’re living in the second-longest “up market” in history, and historically low interest rates are causing investors to be riskier with their money than they otherwise would be if rates were “normal.” The Federal Reserve and central banks continue to intervene (or not intervene), but with no logical plan in place. However profound this might sound, we all know that every up market ends in a down-market bubble pop or crash of some sort.
Looking back at the last crash, the stock market was up 15% at one point in the middle of 2008, but that didn’t change the main plot as it fell almost -60% from top to bottom. The little +15% bump was just a little “character building” in the midst of a horror movie.
Both the All-Issues and Operating-Companies-Only advance/decline (A/D) lines have hit new highs, which is additional evidence that the market is headed higher from here. More recently, however, we’re seeing a series of lower highs and lower lows, indicating that the market is stalling. But this is a good thing and should provide us with a better entry point to take advantage of whatever steam is left in this rally.
As you can see in the chart below, the market crossed over the May 2015 all-time highs and is also trading above the 200-day moving average. These are good things, but the question remains, “Is this a bull trap, and is the market going to fall right through those previous highs and find lower lows — or is the action we’re seeing the climax before the movie ends?”
The market reaching new highs and stalling like it is right now doesn’t give us enough information or provide us with enough evidence to dive head first into the pool. After all, we don’t want to dive into an empty pool now, do we? Additionally, we’ve entered the weakest two months of the year for the stock market, so caution is crucial at this juncture.
So today, much like deciding whether to get married outside when the forecast doesn’t look pretty, we have to decide when it makes sense to take risk in the stock market. As much as I really want to dive head first into stocks today, the metaphorical forecast of precipitation isn’t quite worth taking the risk … yet.
Back when my wife and I were married, if we would’ve decided to take the risk and hold the wedding outside, something tells me it would have rained that day. While in the end it stayed dry, I think we can look back and feel good knowing that we took the conservative route. Unlike weddings that only happen once, there are always more opportunities to invest money tomorrow, next week, or next month. Patience is truly a virtue when it comes to investing, that’s for sure.
Categories: Adam Koos, CFP®, CMT®, Market Commentary, MarketWatch Trading Deck, Published Articles