A quick Google search of the phrase “Dow 20,000” returns 662,000 entries. The subject is covered - much like a blanket of snow covers my driveway here in suburban Chicago. So I have to shovel again soon but before I do so, I'd like to highlight two points about the Dow and the Trump rally that's pushing the index to all-time highs.
The genesis being that this may not be the time to buy stocks. If you’re long equities, many technical signals point to holding on a little longer while reducing your exposure slightly. (See my post last week about taking some chips off the table.)
The first reason for my caution is that buying at these levels is a bit like chasing returns. Has that ship sailed already? A bigger point may be - does the financial benefit gained by making a few points on this seemingly never-ending bull run outweigh the potential downside of not getting out when things go south - which they will at some point.
Here’s where I’m going with this first point:
We see this all the time on runs like this. As the markets rise, investors shift towards buy-and-hold or index investing strategies. They become passive because it (investing) seems easy. Everybody is doing it, right? They eschew active portfolio management strategies. They turn away from advisors, who, in many cases, are the last bastions for protecting investors from themselves. This is a tell-tale sign that the bull market is nearing its apex.
So Investor Joe gets in on Goldman Sachs or IBM, rides it up a few points but gets caught with his pants down when the correction comes. (Remember last week I reminded readers how vicious the last two bear markets have been. Does 50% ring a bell?)
And as John Coumarionos astutely put it in his post last week on Market Watch, “What goes up, stays up. Until it doesn’t. And the smart-money investors can never tell you when the momentum will stop. Except there is ample evidence for investors to realize when stocks have peaked. It’s when investors have thrown their last dollars at the market, because the data show investors buy high and sell low, following momentum in both directions just before it’s about to turn. The momentum factor may exist, but individual investors have proved remarkably adept at letting it punish them with losses rather than being able to exploit it.”
And we know investors are greedy. They hold on far too long. As described in the WSJ, Investors don’t sell when markets are near peaks, nor do they buy market bottoms. A malady that doesn’t just apply to individuals but many advisors as well.”
Works for me. I’ve been there. Emotion is a beast!
The second reason I’m wary at these levels is that it is highly unlikely breaching 20K will lead to a normal pattern of trading at that level and higher. If history is any guide (and it is), it may be several years until the level is exceeded again. After the Dow hit 10,000 for the first time, it didn’t reach that level again for 11 years. Similarly, though the Dow crossed 1,000 in 1966, it wouldn’t see that level again until 1982.
So if Santa ushers in this milestone over the next week or so, it’s likely he’ll take back his gift right way.
Further, as you can see from the chart below (WSJ.com), the first time a major level is surpassed, the price of stocks (P/Es) are usually much higher than the final time. Spencer Jakeb pointed out in his article last week that the average P/E ratio is around 24 the first time a level is reached but more like 13 when the “market finally leaves those marks behind.”
Right now stocks are priced a multiple of 25 or 26, overall. Very expensive. Of course, there is sentiment in some circles that the proposed changes with the new President (and congress) will stimulate the economy and begin to justify these astronomical valuations. It’s hard to say. No matter how we get there, it would appear that there is a lot of heavy lifting to be done to justify a level like 20,000 if prices intend on staying there.
So I’m wary.
Here’s my advice if you see 20,000 on your computer screen. If you feel like celebrating next week or next month by purchasing a special bottle of wine, don’t buy the cheap stuff. The juice may need some staying power if it’s still going to be good for the real celebration.
Stay warm and safe and have a wondeful holiday!
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