Where to Next for Stocks?
The markets continue to trade painfully higher. I say painfully, because I can’t remember a time when so many traders have been so unhappy with the fact that stocks are trading at 52-week highs. I think everyone, including me, is expecting the market to make a substantive correction of at least 5%, and possibly even much more, during the next couple of months. Unfortunately, sellers don’t seem to have received the memo.
The bottom line here is that nobody wants to call a top to this market, as nobody wants to miss out on the potential short-term alpha in stocks. I think this situation is akin to playing with fire. Sure, you might get away with it for awhile, but eventually, you are going to get burned. The way I see it, it is a lot easier to recover from lost opportunity than it is to recover from a third-degree portfolio burn.
If you aren’t in the market right now, then I advise you to wait for the aforementioned pullback. I think that sometime during the next couple of months, you’ll get a great opportunity to buy stocks a lot cheaper than they are now. And, if you have a lot of equity exposure here, you most likely have some good unrealized gains in your portfolio. If this applies to you, then I strongly suggest you place stop-loss orders on all of your winning positions.
The worst thing to experience as an investor, shy of actual lost money, is the wiping away of a sizeable gain. Make sure you protect those gains going forward with a simple stop loss on your winners.
Now, just to give you an idea about how well stocks have done of late, take a look at the chart here of the S&P 500 Index.
As you can see, it’s been a race to the top so far in 2013. Though the pace of the gains certainly has slowed in February, the market continues to trade at levels it hasn’t seen since 2007. How long can this situation continue without a substantive pullback? Nobody knows for certain, but history — as well as common sense — tells us that the answer is most likely not much longer.
So, make sure you act in defense of your own money, because where stocks are heading next could turn that bullish smile into a bearish frown.