Category Archives: Investing Money

Don’t Screw Up Index Investing By Making These 3 Mistakes

My Comments: First, my thanks to all of you who wished us well during IRMA’s visit to Florida. We came through unscathed. We were without power for a number of days and believe me when I tell you cold showers every day are not much fun. And we are now watching Maria carefully.

Second, there is increasing evidence that active asset management is starting to pull ahead of passive investing, which is the focus of this article, written a year ago by Walter Updegrave. Some of the references may be out of date but not the underlying message.

Passive investing as a strategy is always ok for some of your money. Overlaying it with some tactical steps to add value is the next step, something that can be done effectively without going all in with skills you perhaps don’t have.

Walter Updegrave – August 10, 2016

For consistently competitive returns, index funds and their ETF counterparts are the way to go. If you doubt that, just take a look at this new Vanguard research paper that lays out the case for indexing and check out the latest S&P Dow Jones Indices index vs. active scorecard, which shows that fewer than 20% of large-company stock funds beat the Standard & Poor’s 500 index over the five- and 10-year periods ending Dec. 31. But just buying index funds and ETFs doesn’t guarantee investing success. To do that, you’ll also need to steer clear of these three all-too-common indexing mistakes.

Mistake #1: Assuming all index funds are cheap. Since index funds simply buy the stocks or bonds that make up indexes like the Standard & Poor’s 500 or Barclays U.S. Aggregate bond index rather than spend millions on costly research and manpower to identify which securities might perform best, they’re able to pass those savings along to shareholders in the form of lower annual fees. Lower fees translate to higher returns and more wealth over the long term. That advantage is especially valuable today given the forecasts for lower-than-usual investment returns in the years ahead.

But not all index funds and ETFs are bargains. While many are available at an annual cost of 0.10% or less, others sometimes charge 10 times or more than that amount, according to Morningstar data. For example, one fund, Rydex S&P 500 Class C, levies a whopping 2.31% in annual expenses, prompting this headline on a recent post about the fund on the American Institute For Economic Research’s Daily Economy blog: “Is This the Worst Mutual Fund in the World?”

Before you invest in an index fund or ETF, make it a point to know how much it charges in annual fees, especially if you’re investing through a broker or other financial adviser. Then don’t buy unless its expenses compare favorably to funds or ETFs that track the same benchmark. You can gauge whether you’re overpaying by seeing how the expenses of the fund you’re considering stack up versus the expenses of the index funds and ETFs that made the cut for the Money 50, Money Magazine’s list of the best mutual funds and ETFs.

Mistake #2: Playing the niche index game. The beauty of index investing is that it allows you to easily and inexpensively create a well-balanced portfolio for retirement savings or other money you’re looking to invest. For example, by combining just three funds—a total U.S. stock market index fund, a total international stock index fund and a total U.S. bond market index fund (or their ETF counterparts)—you have the foundation for a broadly diversified portfolio of stocks and bonds that can get you to and through retirement.

But many investors fall into the trap of believing that the more bases they cover, the more diversified and better off they’ll be. And investment firms are all too willing to oblige them by marketing ever more specialized index offerings, allowing investors to invest in indexes that track everything from wind power and cyber security to obesity and organic foods.

Diversity is a good thing, but you don’t want to overdo it. Once you have a diversified portfolio of stocks and bonds, the extra benefit you get from venturing into investments that focus on narrow slices of the market or obscure niches can be minuscule or even disappear, since more arcane investments often carry higher fees. You also run the risk of ending up with an unwieldy and overlapping jumble of holdings that’s difficult to manage. And, let’s face it, a lot of what’s done in the name of broader diversification is really more about riding the latest fad.

In short, the more you stick to tried-and-true index funds that track wide swaths of the market at a low cost and resist the temptation to invest in every new indexing variation some firm churns out, the less likely you’ll end up “di-worse-ifying” rather than diversifying your portfolio.

Mistake #3: Using index funds to gamble rather than invest. When the indexing revolution got underway back in the 1970s, the idea was for investors to track the performance of broad market benchmarks like the Standard & Poor’s 500 index. The rationale was that since it’s so difficult to outperform the market, investors are better off trying to match the market’s return as much as possible.

Today, however, many investors see index funds as vehicles that can help them juice performance by quickly darting in and out of the stock or bond market as a whole or making bets on a sector they believe is poised to soar, be it growth, value, small stocks, energy, technology, whatever. ETFs are especially popular with such investors since, unlike regular index funds, ETFs are priced constantly throughout the day and can be traded the same as stocks.

Problem is, succeeding at this approach requires investors to have the foresight to know where the market or specific sectors are headed. That’s a dubious assumption at best. Consider how investors swarmed into tech and growth stocks at the end of the ’90s dot.com bubble, confident that double- or even triple-digit returns would continue, only to see shares crash and burn. Or, more recently, how pundits were predicting Armageddon for stocks in the wake of the Brexit vote, only to see the market climb to new highs.

Bottom line: Indexing works best when you use low-cost index funds that cover broad segments of the stock and bond markets as building blocks to create a diversified portfolio that matches your tolerance for risk—and that, aside from periodic rebalancing, you’ll stick with through good markets and bad. Remember that, and you’ll be more likely to benefit from all that indexing has to offer.

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The World’s Most Deceptive Chart

My Comments: First of all, Happy Labor Day to everyone. I trust you are able to take some time off to spend with family or do something fun to celebrate the end of summer. I’m working very hard these days to complete a project that I call Successful Retirement Secrets (SRS). My plan is to find a way to reach out to the millions of people not yet retired, and share with them secrets I’ve discovered over the years.

These comments from Lance Roberts surfaced a couple of months ago, but they are even more relevant today. He has a lot of charts, some of which I’ve chosen not to include. I have put a link to his article at the end.

If you have money invested and are wondering how all this talk with North Korea might catch up with your retirement, this is good stuff. On the right of this page is where you can schedule a short conversation with me if you are so inclined.

by Lance Roberts | May 7, 2017

I received an email last week which I thought was worth discussing.

“I just found your site and began reading the backlog of posts on the importance of managing risk and avoiding draw downs. However, the following chart would seem to counter that argument. In the long-term, bear markets seem harmless (and relatively small) as this literature would indicate?”


This same chart has been floating around the “inter-web,” in a couple of different forms for the last couple of months. Of course, if you study it at “face value” it certainly would appear that staying invested all the time certainly seems to be the optimal strategy.

The problem is the entire chart is deceptive.

More importantly, for those saving and investing for their retirement, it’s dangerous.

Here is why.

The first problem is the most obvious, and a topic I have addressed many times in past missives, you must worry about corrections.

The problem is you DIED long before ever achieving that 5% annualized long-term return.

Let’s look at this realistically.

The average American faces a real dilemma heading into retirement. Unfortunately, individuals only have a finite investing time horizon until they retire.

Therefore, as opposed to studies discussing “long term investing” without defining what the “long term” actually is – it is “TIME” that we should be focusing on.

Think about it for a moment. Most investors don’t start seriously saving for retirement until they are in their mid-40’s. This is because by the time they graduate college, land a job, get married, have kids and send them off to college, a real push toward saving for retirement is tough to do as incomes, while growing, haven’t reached their peak. This leaves most individuals with just 20 to 25 productive work years before retirement age to achieve investment goals.

This is where the problem is. There are periods in history, where returns over a 20-year period have been close to zero or even negative.”

Like now.

Outside of your personal longevity issue, it’s the “math” that is the primary problem.

The chart uses percentage returns which is extremely deceptive if you don’t examine the issue beyond a cursory glance. Let’s take a look at a quick example.

Let’s assume that an index goes from 1000 to 8000.
• 1000 to 2000 = 100% return
• 1000 to 3000 = 200% return
• 1000 to 4000 = 300% return
• 1000 to 8000 = 700% return

Great, an investor bought the index and generated a 700% return on their money.

See, why worry about a 50% correction in the market when you just gained 700%. Right?

Here is the problem with percentages.

A 50% correction does NOT leave you with a 650% gain.

A 50% correction is a subtraction of 4000 points which reduces your 700% gain to just 300%.

Then the problem now becomes the issue of having to regain those 4000 lost points just to break even.

It’s Not A Nominal Issue

The bull/bear chart first presented above is also a nominal chart, or rather, not adjusted for inflation.

So, I have rebuilt the analysis presented above using inflation-adjusted returns using Dr. Robert Shiller’s monthly data.

The first chart shows the S&P 500 from 1900 to present and I have drawn my measurement lines for the bull and bear market periods.

It’s A “Time” Problem.

If you have discovered the secret to eternal life, then stop reading now.

For the rest of us mere mortals, time matters.

If you are near to, or entering, retirement, there is a strong argument to be made for seriously rethinking the amount of equity risk currently being undertaken in portfolios.

If you are a Millennial, as I pointed out recently, there is also a strong case for accumulating a large amount of cash and waiting for the next great investing opportunity.

Unfortunately, most investors remain woefully behind their promised financial plans. Given current valuations, and the ongoing impact of “emotional decision making,” the outcome is not likely going to improve over the next decade.

For investors, understanding potential returns from any given valuation point is crucial when considering putting their “savings” at risk. Risk is an important concept as it is a function of “loss.” The more risk that is taken within a portfolio, the greater the destruction of capital will be when reversions occur.

Many individuals have been led to believe that investing in the financial markets is their only option for retiring. Unfortunately, they have fallen into the same trap as most pension funds, which is believing market performance will make up for a “savings” shortfall.

However, the real world damage that market declines inflict on investors, and pension funds, hoping to garner annualized 8% returns to make up for the lack of savings is all too real and virtually impossible to recover from. When investors lose money in the market it is possible to regain the lost principal given enough time; however, what can never be recovered is the lost “time” between today and retirement.

Time” is extremely finite and the most precious commodity that investors have.

In the end – yes, market corrections are indeed very bad for your portfolio in the long run. However, before sticking your head in the sand and ignoring market risk based on an article touting “long-term investing always wins,” ask yourself who really benefits?

This time is “not different.”

The only difference will be what triggers the next valuation reversion when it occurs.

If the last two bear markets haven’t taught you this by now, I am not sure what will. Maybe the third time will be the “charm.”

Source: https://seekingalpha.com/article/4052547-worlds-deceptive-chart

U.S. Stock Valuations haven’t been this Extreme since 1929 and 2000

My Comments: I wasn’t here in 1929 but I was here in 2000. If there is such a thing as handwriting on the wall, you should be able to see it. We’d had a great run up and the year 2000 was just around the corner. Everyone was worried that our computers would crash because years were constructed around the last two digits and all of a sudden, both would be ZERO.

As it happened, nothing happened, except the run up suddenly stopped and everyone had to take a deep breath. And quit buying new stuff with all the money we didn’t have anymore since we’d spent it already. And the market crashed.

Aug 22, 2017 by John Coumarianos

“The stock market is now 35% passive and 65% terrified,” says financial adviser and blogger Josh Brown, a.k.a. “The Reformed Broker.” In other words, more investors nowadays are indexing their money and active managers fear for their futures.

Which begs the question, did Brown get it backwards? Should the 35% of stock investments that’s indexed actually be the terrified money? Yes, James Montier and Matt Kadnar of Boston-based asset manager Grantham, Mayo, van Oterloo (GMO) assert in a new paper called “The S&P 500: Just Say No.” The S&P 500 SPX, +0.17% is so expensive, they say, any money tracking the benchmark U.S. stock market index at this point is more speculation than investment.

Here’s how the authors put it: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.

“Going passive eliminates the ability of an active investor to underweight the most egregiously overpriced securities in the index (we obviously prefer a valuation-based approach for stock selection as well). When faced with the third most expensive US equity market of all time, maintaining a normal weight in a passive index seems to us to be a decision that will likely be very costly. Yet despite this, it remains a popular path, with around 30% of all assets in the U.S. equity market in the hands of passive indexers.”

Montier and Kadnar divide stock prices into four components. Since 1970, dividends, earnings growth, profit margins, and P/E multiple changes have contributed 3.4%, 2.3%, 0.50%, and 0.10%, respectively, to the S&P 500’s 6.3% annualized return after inflation.

By contrast, those same inputs have contributed 2.8%, 3.1%, 3.2%, and 3.8% to the index’s stunning 13.6% annualized real returns over the past seven years. In other words, the current rally is being carried by unusually high and persistent profit margins and multiple expansion, or the amount investors are willing to pay for earnings.

For recent returns to persist, profit margins and P/E multiples must continue to expand. That’s unlikely since both of these components are near all-time highs. GMO uses these four components to try to peer into the future by analyzing the historical cycle of profits, and the firm’s forecasts often resemble the signals of Robert Shiller’s “cyclically adjusted PE ratio” or CAPE, which compares current stock prices to the past decade’s worth of real earnings.

Basically, GMO thinks that U.S. stocks over the coming seven years will lose 6% due to P/E multiple contraction, and another 2.8% from margin contraction. While dividend yield and profit gains will contribute 5% to stock returns,, that still amounts to a real total return of -3.9% for the period.

Even assuming the current P/E ratio and profit margins are normal doesn’t allow for the computation of continued robust returns since P/E and margin expansion account for such a large part of recent gains. Basically, this is the third-most expensive U.S. market ever. The only times stock prices have been higher and prospective returns lower were in 1929 and 2000. A different cyclical adjustment that fund manager John Hussman uses shows the current market as the second-most expensive one.

Next, Montier and Kadnar examine stocks from a more bottom-up perspective, using the median stock’s Shiller PE and Price/Sales ratio. It turns out that the median stock’s Price/Sales ratio has never been more expensive since 1970. The median Shiller PE of stocks in the index is not quite as extreme, but still among the highest readings since 1970.

Finally, Montier and Kadnar run a Benjamin Graham-style stock screen based on four criteria: Earnings yield twice the AAA bond yield; dividend yield two-thirds of the AAA bond yield; total debt less than two-thirds of tangible book value, and Shiller PE of less than 16x. They find no U.S. stocks currently meeting those criteria. The authors quote Graham: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in U.S. Treasury bills.”

Even allowing for the fact that large U.S businesses are exhibiting monopolistic tendencies, and profit margin cycles appear different lately than in the past, Montier and Kadnar argue that stocks still aren’t cheap.
The upshot is that investors should have as little exposure to U.S. stocks as possible. Foreign stocks don’t offer compelling returns either, but they are priced to deliver at least somewhat higher returns than U.S. stocks. That’s especially true for emerging markets stocks.

While investors who seek relative value must venture abroad, those investing on more absolute terms should hold some cash. “When there is nothing to do, do nothing,” advise the authors. Both relative and absolute value investors should remember economist John Maynard Keynes’s remark that they will necessarily seem “eccentric, unconventional, and rash in the eyes of average opinion.”

U.S. stock valuations haven’t been this extreme since 1929 and 2000

My Comments: I wasn’t here in 1929 but I was here in 2000. If there is such a thing as handwriting on the wall, you should be able to see it. We’d had a great run up and the year 2000 was just around the corner. Everyone was worried that our computers would crash because years were constructed around the last two digits and all of a sudden, both would be ZERO.

As it happened, nothing happened, except the run up suddenly stopped and everyone had to take a deep breath. And quit buying new stuff with all the money we didn’t have anymore since we’d spent it already. And the market crashed.

Aug 22, 2017 by John Coumarianos

“The stock market is now 35% passive and 65% terrified,” says financial adviser and blogger Josh Brown, a.k.a. “The Reformed Broker.” In other words, more investors nowadays are indexing their money and active managers fear for their futures.

Which begs the question, did Brown get it backwards? Should the 35% of stock investments that’s indexed actually be the terrified money? Yes, James Montier and Matt Kadnar of Boston-based asset manager Grantham, Mayo, van Oterloo (GMO) assert in a new paper called “The S&P 500: Just Say No.” The S&P 500 SPX, +0.17% is so expensive, they say, any money tracking the benchmark U.S. stock market index at this point is more speculation than investment.

Here’s how the authors put it: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.

“Going passive eliminates the ability of an active investor to underweight the most egregiously overpriced securities in the index (we obviously prefer a valuation-based approach for stock selection as well). When faced with the third most expensive US equity market of all time, maintaining a normal weight in a passive index seems to us to be a decision that will likely be very costly. Yet despite this, it remains a popular path, with around 30% of all assets in the U.S. equity market in the hands of passive indexers.”

Montier and Kadnar divide stock prices into four components. Since 1970, dividends, earnings growth, profit margins, and P/E multiple changes have contributed 3.4%, 2.3%, 0.50%, and 0.10%, respectively, to the S&P 500’s 6.3% annualized return after inflation.

By contrast, those same inputs have contributed 2.8%, 3.1%, 3.2%, and 3.8% to the index’s stunning 13.6% annualized real returns over the past seven years. In other words, the current rally is being carried by unusually high and persistent profit margins and multiple expansion, or the amount investors are willing to pay for earnings.

For recent returns to persist, profit margins and P/E multiples must continue to expand. That’s unlikely since both of these components are near all-time highs. GMO uses these four components to try to peer into the future by analyzing the historical cycle of profits, and the firm’s forecasts often resemble the signals of Robert Shiller’s “cyclically adjusted PE ratio” or CAPE, which compares current stock prices to the past decade’s worth of real earnings.

Basically, GMO thinks that U.S. stocks over the coming seven years will lose 6% due to P/E multiple contraction, and another 2.8% from margin contraction. While dividend yield and profit gains will contribute 5% to stock returns,, that still amounts to a real total return of -3.9% for the period.

Even assuming the current P/E ratio and profit margins are normal doesn’t allow for the computation of continued robust returns since P/E and margin expansion account for such a large part of recent gains. Basically, this is the third-most expensive U.S. market ever. The only times stock prices have been higher and prospective returns lower were in 1929 and 2000. A different cyclical adjustment that fund manager John Hussman uses shows the current market as the second-most expensive one.

Next, Montier and Kadnar examine stocks from a more bottom-up perspective, using the median stock’s Shiller PE and Price/Sales ratio. It turns out that the median stock’s Price/Sales ratio has never been more expensive since 1970. The median Shiller PE of stocks in the index is not quite as extreme, but still among the highest readings since 1970.

Finally, Montier and Kadnar run a Benjamin Graham-style stock screen based on four criteria: Earnings yield twice the AAA bond yield; dividend yield two-thirds of the AAA bond yield; total debt less than two-thirds of tangible book value, and Shiller PE of less than 16x. They find no U.S. stocks currently meeting those criteria. The authors quote Graham: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in U.S. Treasury bills.”

Even allowing for the fact that large U.S businesses are exhibiting monopolistic tendencies, and profit margin cycles appear different lately than in the past, Montier and Kadnar argue that stocks still aren’t cheap.
The upshot is that investors should have as little exposure to U.S. stocks as possible. Foreign stocks don’t offer compelling returns either, but they are priced to deliver at least somewhat higher returns than U.S. stocks. That’s especially true for emerging markets stocks.

While investors who seek relative value must venture abroad, those investing on more absolute terms should hold some cash. “When there is nothing to do, do nothing,” advise the authors. Both relative and absolute value investors should remember economist John Maynard Keynes’s remark that they will necessarily seem “eccentric, unconventional, and rash in the eyes of average opinion.”

This is how much fees are hurting your retirement

Thursday = Retirement Issues

My Comments: Value is in the eye of the beholder. When we need something, and for whatever reason, choose not to do it by ourselves, we spend money. If you are selling advice, or pork chops, or cars, people are going to spend money when they have to.

As a self-styled expert on retirement planning, what you pay for financial advice can run into several percentage points every year. What is your frame of reference that determines if you are getting value in exchange for what you are paying?

Aug 17, 2017 Craig L. Israelsen

This article is reprinted by permission (?) from NextAvenue.org.

The importance of keeping your investment portfolio costs low should be self-evident. They come directly out of your pocket. But you may be surprised to see how much it matters to stick with low-fee mutual funds and Exchange-Traded Funds (ETFs). I’ve run the numbers.

The two primary portfolio costs consist of what’s known as the “expense ratio” of the funds or ETFs (the annual fee charged as a percentage of assets) and the “advisory fee “(if there is a financial adviser involved).

The average expense ratio among all mutual funds is roughly 100 basis points or 1.0% (one basis point is one hundredth of 1%). Assuming an annual advisory fee of 100 basis points, or 1%, the total portfolio cost is 2% (or 200 basis points). At that level, for a diversified fund portfolio with a starting balance of $1 million, the average annual withdrawal for a retiree between age 70 and 95 is about $126,426 (assuming the retiree makes the government’s Required Minimum Distribution or RMD). Remember: this is an average withdrawal figure over a 25-year period; the actual RMD will vary each year based on your portfolio’s performance during the prior year and each year’s RMD percentage.

If the cost of funds in the portfolio is cut in half by using mutual funds or ETFs with lower expense ratios, the overall portfolio cost can be reduced from 2% to 1.5%. By doing so, the average annual withdrawal then increases to $136,218, meaning the retiree will have roughly $10,000 more income each year. That works out to a “raise” of about $830 a month during retirement.

$32,000 more a year in retirement

But you can do even better. It is now possible, by using low-cost ETFs, to build a diversified retirement portfolio for as low as .10% (or 10 basis points). If the advisory fee were reduced by a mere 10% down to .90% (or 90 basis points), the overall portfolio cost could be lowered to 1.0%. At that level, the retiree can withdraw an average of $146,853 each year — or an additional $10,000 annually.

Finally, if the adviser lowered his or her fee to .40% and the fund expenses amounted to .10%, the total portfolio cost would be just .50%. At that level, $158,407 would be the average amount withdrawn each year.

All together, by slashing fund expense ratios from 1.0% to .10% and the advisory fee from 1% to .40%, the retiree could receive $32,000 additional annual retirement income — or roughly $2,600 more each month between the ages of 70 and 95. Clearly, the impact of portfolio costs is huge.

A modern diversified portfolio

Here’s how to put together a low-cost, diversified portfolio that I call the 7Twelve® portfolio. If you use low-cost, actively managed funds from various fund families, the overall fund expense can be as low as .54%. If you use ETFs from various fund families, the cost can drop to .16%. And if you use just Vanguard ETFs, the overall fund expense ratio can be as low as .10% (I have no affiliation with Vanguard; they’re just an investment company specializing in keeping costs low).

The idea of building a diversified portfolio for as little as .10% is not theoretical. It is a reality and can and should be considered.



Craig L. Israelsen, Ph.D., teaches in the personal financial planning program at Utah Valley University in Orem, Utah. He is the author of “7Twelve: A Diversified Investment Portfolio With a Plan” and his website is 7TwelvePortfolio.com.

Disruption Of Confidence

Monday = Investing Money:

I’d like to think that my posts help someone, anyone? Professionally I’ve lived in the financial world for over 40 years and it pains me to say I haven’t a clue what’s going to happen next. What’s telling is that others, far more competent than I, don’t have a clue either.

Lance Roberts, whose comments I share this week, is a technician, attempting to glean clues from a rigorous adherence to mathematics and the signals that supposedly exist and reveal the future when correctly interpreted. Tread carefully.

Aug. 20, 2017 Lance Roberts Seeking Alpha

As noted last week:
“The weakness in the market previously, combined with the threats between the U.S. and North Korea, led to a fairly sharp unwinding in equities on Thursday which in turn triggered a short-term sell signal.

That sell-off has remained confined to the current bullish trend line but has threatened to violate the 50-dma (day/daily moving average). If the market is unable to regain the 50-dma on Monday, and remain above it for the balance of the coming week, the most likely move in the markets will be lower.”

I have updated the chart above (see HERE) through Friday afternoon. I followed that analysis up on Tuesday, stating:
“On Monday, the market surged out of the gate as headlines suggested ‘geopolitical risk’ had subsided. I find this particular explanation hard to digest, given the rising rhetoric of a potential trade war with China, violence in Charlottesville over the weekend, no resolution with North Korea, etc., so forth, and so on. I find little evidence of a global turn in geopolitical stresses currently.

Monday’s ‘buy the dip’ frenzy was no different. The question will be whether the market can both reverse the short-term ‘sell signal’ and climb above the previous resistance of the old highs? Such a reversal would end the current consolidation process and allow for additional capital to be invested.”

That was so last Tuesday…

The reversal, at least to this point, was not to be the case.

Exactly one week after last week’s sell-off, the market dumped again. This time it was the news of the complete dismemberment of President Trump’s “economic council” of CEOs along with the rumor that Gary Cohn would be exiting his position at the White House as well. While the latter turned out to be #FakeNews, the damage had already been done as market participants began to question the ability of the Administration to get its promised legislative action advanced.

Given the run-up in the markets since the election, which was based on tax cuts/reform, infrastructure spending, repatriation and repeal of the Affordable Care Act, the lack of progress on that agenda has left the markets pushing higher on “hope” and “promises.” The disbanding of the economic council has led to some disruption of that confidence.

Importantly, with the market currently on a weekly sell signal, it also compounded the bulls’ problems by breaking the bullish trend line that begins in February of last year.

This is not a “panic and sell everything” signal…yet.

It is, however, a potentially important change to the bullish backdrop of the market in the short-term particularly given the ongoing deterioration in the internal participation in the market. Note that when sell signals have been triggered from similarly high levels (vertical red dashed lines), subsequent corrections have been fairly brutal.

Previously, I questioned whether or not to “buy the dip?”

“My best guess currently is – probably. But not yet.”

I also stated the following two reasons for that sentiment:

1. Bull markets don’t typically end when the mainstream media is “peeing down both legs” over the 1.5% drop on Thursday.

2. The bullish uptrend remains intact and “fear” gauges remain confined to a downtrend.

This remains this week as well. The sell-off so far remains contained above the previous bullish breakout to new highs and remains above current price support levels. Furthermore, while volatility did pick up a bit on Thursday, it has not exceeded last week’s volatility spike, suggesting traders are less worried about a correction than media headlines makes it appear.

Global Markets: Traders Put Record Cash To Work

My Comments: I recall a saying to the effect ‘pride goeth before a fall’. Rampant enthusiasm about investing across the market spectrum probably suggests the same thing. Of course, there’s always a follow up question about how much pride is necessary to trigger a fall. Just know that one is coming and if it concerns you, there are remedies.

Joe Ciolli  /  Jul 23, 2017

In global markets, all signs of sentiment are pointing up. And it’s that very unbridled enthusiasm that could spell their downfall.

But before we get into the negative implications, let’s take stock of everything that shows just how overtly bullish investors are feeling right now.

First, private client cash levels have dropped to a record low as a percentage of total assets, according to data compiled by Bank of America Merrill Lynch. That means investors are feeling more emboldened than ever to put that money to work in the market. They’re choosing that over holding money on the sidelines — a risk-averse move typically associated with uncertainty.

Institutional investors are also holding the lowest levels of cash since the start of the eight-year bull market, survey data compiled by Citigroup show. The measure now sits at less than one-third of a multi-year high reached in 2016.

Second, active equity funds just absorbed their biggest inflows in 2 1/2 years, according to BAML. This is a sign of confidence not just for the market, but for fund managers that make their living picking stocks. It’s a rare bright spot for active management, which has struggled alongside the rise of the red-hot ETF industry.

Third and lastly, in perhaps the most direct reflection of swelling confidence, global markets are hitting records. The S&P 500 and its more tech-heavy counterpart, the Nasdaq 100, hit all-time highs this past week. The gauges are up 265% and 466%, respectively, over the course of the bull market.

Meanwhile, credit indexes have done the same amid 30 straight weeks of investment-grade bond inflows, BAML data show.

What’s resulted is the so-called “Icarus trade,” which has been characterized by the “melt up” seen in risk assets since the start of 2016.

But there’s a downside to flying too close to the proverbial sun — sooner or later, your wings will melt. BAML sees that happening in the second half of the year as the bullish conditions outlined above overheat further.

A “big fall in markets” will be an “autumn, not summer event,” strategists at Bank of America Merrill Lynch wrote in a client note. “Icarus won’t soar forever.”

The comments echo ones made by BAML the week before last, when they cited central bank tightening as a threat to the gradual trek higher in risk assets.

So where do we stand right now? Despite the gloomy late-2017 forecast from BAML, it’s actually a great time to be an equity investor. Company stock prices are moving more than ever on the earnings reports that are trickling out, representing a big potential windfall in the short-term for traders willing to do their homework.