By: Michael Sincere
MIAMI (MarketWatch) — I know what you’re thinking. You’re thinking: Is this market going to go up another 10%? I have no idea. But this being a powerful market that can blow your account clean off if you’re wrong, you’ve gotta ask yourself: “Do I feel lucky?”
Most investors seem to feel pretty confident that this market will never go down. But if you’ve studied bear markets, you know how this story will end.Don’t forget: Human nature never changes.
At the point of maximum giddiness (or pain if you’re short), the market always teaches investors a costly lesson. Right now, investors are chasing yield, but all it takes is one bad day to wipe out a year’s worth of gains.
Sentiment indicators such as Investors Intelligence are at historic highs (that is bearish), and the RSI Wilder indicator is telling us the market is seriously overbought. Yes, the market can still go higher, but it’s on borrowed time.
Don’t believe me? When you are standing 17,000 points in the air at the top of Dow Mountain, and the market is priced for perfection, there is nowhere to go but down.
Inflation has nowhere to go but up
Although the market still has room to rise, so do interest rates. In fact, the odds are very good that interest rates will creep higher, and this will affect bonds and stocks.
There is also an 800-pound gorilla in the room, and that is inflation. Shoppers already know that inflation is spreading. For example, cereal boxes are getting smaller while prices are rising. The price of orange juice and other commodities are skyrocketing. I could give a dozen more examples. The Fed seems to want inflation, as if it’s desirable. Here’s what I say to the Fed: Be careful what you wish for.
Playing the odds
Here’s how the market odds look to me: At the most, the upside is 5% or 10%, while the downside is potentially 25% or 30%. I’m not saying the market is going to fall that much, but in previous bear markets that’s exactly what happened (or worse) over several months or years.
Like the game of three-card monte, while most investors are celebrating the all-time highs, prudent investors are looking underneath the hood. For example, the number of stocks making new highs is shrinking every week. And the stocks that are making new highs are not leading stocks, but many unknowns. That’s a red flag.
Ignore history at your peril
Many professional money managers have never experienced a crash or bear market. That means that during the next bear market, they’re going to stick to what they know best: buy and hold. If it’s a particularly vicious bear market, they’ll be looking for new clients while their former clients eat leftovers.
By the way, for those who believe it’s different this time because of the Fed, a bear market is coming. It always does (on average every 3.4 years since 1929). Right now, millions of investors think the market is bullet-proof. After all, for five years they have ridden the coattails of a Fed-induced bull market. Now, every bullish investor seems like a genius, but that won’t last much longer.
It’s not fun being on the losing team
With help from the Fed, the market is soaring, thrilling the bulls, who celebrate with party hats and hubris. The only thing different this time is the Fed has delayed the inevitable, but that won’t last forever.
The bears in a bull market are party-poopers, the designated driver, the boy who cried wolf. Bears are taunted and despised. But bears are also the ones who survive after a severe correction or unexpected crash.
Do you feel lucky? It will take more than luck to survive what is coming our way.