Is it Time to be Cautious About Stocks?

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Should We Be Expecting a Major Market Correction?

Those of you, who know me, understand that I don’t try to “time” the market. I think that is a game that can’t be won over the long haul. However, you also know that I feel it is very important to avoid losing money, especially if you are within 5 years of retirement. This is for both the 5 years before and the 5 years after retirement.

My Market Prediction

I want to be clear, I am not predicting that a major market correction is about to happen. What I am saying is that math and common sense tell us this is a time for extreme caution, if you have stock investments. The market has gone up for more than 8 years without a significant correction of over 10%. This is one of the longest runs without such a correction since World War II.

Recently, we have seen some signs of the market meeting resistance to further significant increases.

What’s Happening

The first one is that, prior to last quarter; profits have dropped for 6 straight quarters, even though the market has been reaching new highs over that period. This is very unusual as stock prices are supposed to reflect business profitability. This disconnect cannot last forever.

The second, and possibly more concerning item is called the “Ohama Titanic Syndrome.” You can look it up (it is not “Obama” just to be clear). This signal occurs when the market hits a new 52 week high and then within a week, the number of stocks hitting new 52 week lows exceeds the number of stocks hitting new 52 week highs in 4 out of 5 days. This happened this week. It doesn’t mean that markets will crash, but historically, according to MarketWatch, when this happens, a 10% drop usually follows soon thereafter.

Now is the Time to be Watching

Given that the longer markets go without a correction, the ultimate correction becomes more severe, it seems that this is a time that bears watching and caution. I recommend that it would be worth your time to review your portfolio and take the time to reposition in a more defensive way.

The stock market can be a wonderful place to invest. If you choose to use the market in your portfolio, regardless of whether you buy individual stocks, mutual funds, ETF’s or managed portfolio, stock investing requires care and tending. Just like your garden, if you aren’t taking care of it, things will not grow and blossom. In fact, the opposite might be true. If you don’t want to take the time, then this might be a great time to explore alternatives that don’t require that much attention.


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