Get Defensive. Buy high quality, dividend yielding stocks in consumer staples, medical related companies, and other inflexible goods/services providers. Seek out high yielding money markets (5%+) and high quality bonds, including treasury notes.
We will see a massive correction over the next year in the stock market. A minimum of 10%, and probably much more.
1) Technical Analysis indicates we reached a triple top on the major indexes. We did so after 13 quarters of double digit earnings growth. That growth is now in the single digits, and by even most bullish analysts estimates, likely to decline and revert to historical means (7% approx).
2) Stocks have P/E ratios now that are based on assumptions of continued double digit earnings growth. Should that assumption - which again, is arguably inherently flawed (see 1 above) - prove wrong, then stocks will be trading at far richer valuations than they are now. In other words, the P will get larger, and the E will shrink. You will then be stuck with a stock that will have to correct downwards to match a more normalized P/E ratio.
3) Housing and lending will continue to act as a drag on the economy. In fact, it is probable that the lending and housing problems have not yet been felt in terms of consumer spending. I would argue that the meltdown has just begun, and that exotic mortgage fueled real estate market is on the verge of imploding.
4) Consumers have saved negative amounts again this year, the first time negative savings rates were recorded two years in a row since 1929, and this can't continue forever, especially when they can no longer leverage equity from their homes to sustain continued consumption that is disproportionate to their income gains. This will correct. Simple math dictates it has to. Consumer spending accounts for 2/3rds of the economic activity of the U.S., which in turn drives growth in both developed (Japan, Germany) and emerging (China, Brazil, Thailand) markets.
5) Inflation remains a huge risk. I would argue that inflation is understated (especially energy, rental rates, food, commodity prices [which get passed through])in all 'official' metrics. but it remains stubbornly high even by those official metrics. If rate hikes loom on the horizon, this will pose serious financial threats to consumer spending, corporate profits, and ultimately, the markets.
6) Geopolitical risks remain high, especially in the case of Iran, Venezuela, Nigeria, Russia and North Korea.
7) A fast rise of 18% in the U.S. markets over 6 months far exceeds the historical returns of approximately 8% per annum. On a per annum basis, that equates to 36% per annum, which is 4.5 times the historical average, fueled by above average corporate earnings growth which, again, is now slowing.
8 ) Emerging markets are overheated by all objective valuations, and there is a high risks of further problems in these markets, which could very well threaten liquidity.
9) The U.S. market has gone 1000 days, the longest stretch since 1954, without a true correction. Statistically speaking, this is an anomaly, and anomalies are not permanent.
One does not always have to leave one's chips on the tables. This is especially true when all objective indicators can lay the foundation for the case to lock in profits and wait for a 'reversion to all averages' to set in, which would almost certainly lead to a market correction.
Get defensive. Now is not the time to try and stretch gains. Wait for the inevitable correction. Pick your sweet spots. Don't rush into 'bull traps,' as the dips will not be buying opportunities, but a prelude of more pain to come.
The liquidity excesses of the last 5 years will take a while to work off. Many people will lose much paper wealth during the impending correction.
Protect your assets. Don't listen to 'gurus' or 'analysts' who have a vested interest, working on behalf of Wall Street, to ensure that people continue to churn their accounts, and ply dollars, either new or on a rotational basis, into markets that are set to correct. They don't care about you or your money. They only care about fostering a false sense of financial security to lure your hard earned dollars away from you, regardless of the how nasty the results are to your portfolio, so that they earn big bonuses.
You don't have to play in a rigged game. Wait until the rules are reset (numerically), and control your own financial destiny. Be skeptical an suspect of every word that anyone involved in the investment profession blathers. Dissect every word. Trust nothing and no one.
If you follow this advice, you will thrive will others get crushed.
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