Tag Archives: money management

10 Social Security Terms To Know And Understand

My Comments: Happy Thanksgiving everyone!

For those of you still not signed up and receiving monthly benefits, here’s some useful things to know.

For those of you who attended my Social Security workshops, you’ll recall the acronyms that appear on every page. There’s even a couple more here for you to learn.

Maurie Backman – The Motley Fool – Nov. 10, 2017

Social Security serves as a key source of income for countless retirees and disabled individuals.

It’s also an extremely complex program loaded with rules and terminology. If you’re attempting to learn about Social Security (which is something you should do, regardless of how old you happen to be), here are a few key terms you’ll need to understand.

1. OASDI

OASDI stands for old age, survivors, and disability insurance, and in the context of your paycheck, it’s the tax used to fund the Social Security program. The current OASDI tax rate is 12.4%. If you work for an outside company, you’ll lose half that amount of your earnings up to a certain income limit, while your employer will pay the remaining 6.2%. If you’re self-employed, however, you’ll pay the full 12.4% up front.

2. SSI

SSI stands for supplemental security income, and it’s different from OASDI in that it’s a program funded by general tax revenues, not Social Security taxes. SSI is designed to help those who are over 65, blind, or disabled with limited financial resources keep up with their basic needs.

3. FICA Tax

FICA stands for the Federal Insurance Contributions Act. It’s the tax that’s withheld from your salary or self-employment income that funds both Social Security and Medicare. For the current year, FICA tax equals 15.3% of earned income up to $127,200 (12.4% for Social Security and 2.9% for Medicare), but those making above $127,200 will continue to pay 2.9% FICA tax on income exceeding that threshold. In 2018, the earnings cap will rise to $128,700.

4. Social Security credits

In order to collect Social Security benefits, you must earn enough credits during your working years. In 2017, you’ll receive one credit for every $1,300 in earnings, up to a maximum of four credits per year. For 2018, the value of a single credit will rise to $1,320 of earnings. Those born in 1929 or later need 40 credits to qualify for benefits in retirement.

5. AIME

AIME stands for average indexed monthly earnings, and it’s used to calculate your personal Social Security benefit. The amount you receive from Social Security is based on your highest 35 years of earnings. To arrive at your AIME, your past earnings are adjusted for inflation so that they don’t lose value.

6. Full retirement age

Your full retirement age, or FRA, is the age at which you’re eligible to collect your Social Security benefits in full. FRA is based on your year of birth, and for today’s older workers, it’s 66, 67, or 66 and a number of months. Though you’re allowed to claim benefits prior to reaching FRA (the earliest age is 62), doing so will cause you to collect a reduced benefit amount — permanently.

7. Delayed retirement credits

Though waiting until full retirement age will ensure that you collect your benefits in full, if you hold off on filing for Social Security past FRA, you’ll rack up delayed retirement credits that will boost your benefits. Specifically, for each year you wait, you’ll get an 8% increase in your payments. Delayed retirement credits stop accruing at age 70, so that’s typically considered the latest age to file for Social Security (even though you can technically wait even longer than that).

8. Trust Fund

The Social Security Trust Fund was established in the early 1980s to cover any future shortfalls the program might face. If Social Security has a year in which it collects more taxes than it needs to use, that money is placed in the Trust Fund and invested in special Treasury bonds. Once Social Security’s incoming tax revenue fails to cover its scheduled benefits, the Trust Fund will be tapped to make up the difference. Come 2034, however, the Trust Fund is expected to run out of money, at which time future recipients might face a reduction in benefits.

9. COLA

No, we’re not talking about a soft drink. In the context of Social Security, it stands for cost-of-living adjustment, and it’s designed to help beneficiaries retain their purchasing power in the face of inflation. Back in the day, those who collected Social Security received the same benefit amount year after year. But beginning in 1975, beneficiaries have been eligible for automatic COLAs based heavily on fluctuations in the Consumer Price Index. COLAs are not guaranteed, however. If consumer prices don’t climb in a given year, benefits can remain stagnant. Such was the case as recently as 2016.

10. Survivors benefits

Survivors benefits are designed to provide income for your beneficiaries once you pass. Those benefits are based on your earnings records and the age at which you first file for Social Security. Surviving spouses, children, and even parents of deceased workers are eligible for survivors benefits.
Clearly, there’s a lot to learn about Social Security, but familiarizing yourself with these key terms will help you better understand how the program works. It also pays to read up on ways to maximize your benefits so that you end up getting the best possible payout you’re entitled to.

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President Trump and Tribalism

My Comments: Some of you will see this as a political statement by me and perhaps recoil from it. I hope not.

We are in the midst of a national, if not global, re-evaluation of the values that underly society. On a personal level, I’m very troubled by Trump and how his values about life, about other people, about truthfulness, about the rule of law differ so greatly from my values. I’m less troubled by the political direction he’s pushing us.

That’s because, short of a global nuclear war, the outcome is very likely to be a re-affirmation of the assumptions that drove our nation and our economy toward greatness. Trump represents an effort to roll back the tides, and you know how that’s likely to play out. (See King Canute above.)

From an economic perspective, it’s a non-starter. Sooner or later, his narrow focus will doom him and those around him. Personally, I refuse to live in the past. I’m concerned about the now and tomorrow.

Ronald Brownstein on Nov 2, 2017

Although in dramatically different ways, Tuesday’s terrorist attack in New York and the Republican tax plan scheduled for release Thursday raise the same jagged question: In the Donald Trump era, is it possible for a deeply divided America to sustain any shared interest or common purpose?

The country obviously faced difficult divisions long before this president was elected. But he’s operated in a uniquely tribal fashion that has ominously, and even deliberately, widened those divides. In office, he has abandoned any pretense of seeking to represent the entire country. How deep a crevice he digs may turn on how much, if at all, the Republican congressional majorities resist his divisive tendencies.

Since announcing his presidential campaign, Trump has prioritized what I’ve called the “coalition of restoration”: the primarily older, blue-collar, non-urban, and evangelical whites who combine unease about America’s demographic and cultural change with anxiety about their place in an evolving economy.

Since January, Trump has repeatedly moved to show his coalition that he will resist the changes they fear. That impulse has been evident in his serial travel bans targeting mostly Muslim countries; his attempt to bar trans soldiers from the military; his forgiving reaction to the white-supremacist violence in Charlottesville, Virginia; and his support for preserving Confederate monuments.

Trump displayed a similar instinct following the New York attack, appealing to fear of the assailant’s Muslim background. In a flurry of tweets on Tuesday evening, Trump immediately denounced, as a “Democratic” invention, the “diversity lottery” immigration program that allowed the attacker to live in the United States. Leave aside that George H.W. Bush signed the lottery program into law, or that all Senate Democrats (along with 14 Republicans) supported ending it during the 2013 debate over comprehensive immigration reform. The key is that Trump’s reaction betrayed two central components of his political identity: his instinct to view any crisis more as an opportunity to divide than to unite, and how reflexively he portrays immigrants as a threat.

Trump is far from the first Republican tugged toward that dark star. But the party has sent mixed signals about how far it will follow him. On the one hand, this year’s attacks from Virginia gubernatorial candidate Ed Gillespie on so-called “sanctuary cities” and the Central American gang MS-13 have set a template for Trump-like anti-immigrant messages that many Republicans are likely to adopt in the midterms. On the other, Trump has struggled to build momentum for a bill to cut legal immigration in half, and he’s had trouble unifying congressional Republicans behind his demand for a border wall (which faces majority public opposition).

On immigration, Republicans appear genuinely divided—mostly by geography, partly by ideology—over how closely to join Trump in targeting whites most uneasy about the new arrivals. That hesitance is understandable given that, by 2020, minorities are likely to constitute a majority of all Americans under age 18.

But on taxes, congressional Republicans are placing an equally narrow bet. With Trump’s intermittent support, the GOP is advancing a tax plan aimed at a few voters at the pinnacle of the income pyramid. Although the numbers may change somewhat in the new House plan, the most comprehensive nonpartisan analysis of the GOP’s original blueprint found that it would shower fully four-fifths of its benefits on the top 1 percent of earners by 2027.

By diverting so much federal revenue to that one group, Republicans are ensuring future conflict with others. That lopsided allocation leaves them offering only small tax cuts to working-class voters, as well as possible tax increases to many upper middle-class families already recoiling from Trump’s behavior and cultural agenda. Their plan ensures they will pursue deep cuts in domestic discretionary programs that invest in the productivity of the increasingly diverse future generations—including programs in education and scientific research. It also means they will face growing demands from their fiscal hawks to cut entitlements, which benefit the predominantly white older population whose votes underpin their electoral coalition.

Stocks for the Long Run? Not Now

My Comments: There is increasing uncertainty about the stock market. This uncertainty has been growing now for the past 3 plus years. The long term trends described below, coupled with historically low interest rates, suggest the next decade will be disappointing to most of us.

This analysis comes from a Guggenheim Investors report published last September. I haven’t included all the many charts as you will be better served by going directly to the source to see them. https://goo.gl/UL1SSP

If nothing else, you should read the conclusion below…

September 27, 2017 |by Scott Minerd et al, Guggenheim Investments

Introduction

Valuation is a poor timing tool. After all, markets that are overvalued and become even more overvalued are called bull markets. Over a relatively long time horizon, however, valuation has been an excellent predictor of future performance. Our analysis shows that based on current valuations, U.S. equity investors are likely to be disappointed after the next 10 years. While the equity market could continue to perform in the short run, over the long run better relative value will likely be found in fixed income and non-U.S. equities.

Elevated U.S. Equity Valuations Point to Low Future Returns

U.S. stocks are not cheap. Total U.S. stock market capitalization as a percentage of gross domestic product (market cap to GDP) currently stands at 142 percent. This level is near all-time highs, greater than the 2006–2007 peak and surpassed only by the internet bubble period of 1999–2000. This reading is no outlier: It is consistent with other broad measures of U.S. equity valuation, including Robert Shiller’s cyclically adjusted price-earnings ratio (CAPE), Tobin’s Q (the ratio of market value to net worth), and the S&P 500 price to sales ratio.

U.S. Equity Valuation Is Approaching Historic Highs

Here is the bad news for equity investors: At current levels of market cap to GDP, estimated annualized total returns over the next 10 years look dismal at just 0.9 percent (before inflation), based on previous trends. Intuitively this makes sense: Looking back at the history of the time series, it is clear that an excellent entry point into the equity market for a long-term investor would have been a period like the mid-1980s, or in the latter stages of the financial crisis in 2009. Conversely, 1968, 2000, and 2007 would have been good times to get out.

Market Cap to GDP Has Been a Strong Predictor of Future Equity Returns

Market cap to GDP is a useful metric because it has proven to be an accurate predictor of future equity returns. As the chart below shows, market cap to GDP has historically been highly negatively correlated with subsequent S&P 500 total returns, particularly over longer horizons where valuation mean reversion becomes a significant factor. Over 10 years, the correlation is -90 percent.

Market Cap to GDP Has Been a Good Predictor of Equity Returns 10 Years Out

It would be easy to assume that the rise in stock valuations is justified by low rates. A similar argument is made by proponents of the Fed model, which compares the earnings yield of equities to the 10-year Treasury yield as a measure of relative value. While there is some relationship between interest rates and valuation as measured by market cap to GDP, low rates do not explain why equities are so rich. At the current range of interest rates (2–3 percent), we have seen market cap to GDP anywhere from 47 percent to current levels of 142 percent—hardly a convincing relationship. In short, interest rates tell us little about where market cap to GDP, or other valuation metrics, “should” be.

Fixed Income Offers Better Relative Value

For a measure of relative value, we compared expected returns on equities over 10-year time horizons (as implied by the relationship with market cap to GDP) to the expected return on 10-year Treasurys—assuming that the return is equal to the prevailing yield to maturity. Typically, equities would have the higher expected returns than government bonds due to the higher risk premium, but in periods when equity valuations have become too rich, future returns on U.S. stocks have fallen below 10-year Treasury yields. Not surprisingly, past periods where this signal has occurred include the late 1990s internet bubble and 2006–2007.

The chart below demonstrates that if equities over the next 10 years are likely to return just 0.9 percent, 10-year Treasury notes held to maturity—currently yielding about 2.2 percent—start to seem like a viable alternative. The fact that S&P 500 returns over the past 10 years have not been as low as the model predicted can at least be partially explained by extraordinary monetary policy, which may have helped to pull returns forward, but in doing so dragged down future returns.

Conclusion

Based on the historical relationship between market cap to GDP ratios and subsequent 10-year returns, today’s market valuation suggests that the annual return on a broad U.S. equity portfolio over the next 10 years is likely to be very disappointing. As such, investors may want to seek better opportunities elsewhere. Equity valuations are less stretched in other developed and emerging markets, which may present more upside potential.

In fixed income, low yields should not deter investors, as our analysis indicates that U.S. Treasurys should outperform equities over the next decade. But as we explained in The Core Conundrum, low Treasury yields should steer investors away from passively allocating to an aggregate index that overwhelmingly favors low-yielding government-related debt. In particular, sectors not represented in the Bloomberg Barclays Aggregate Index, including highly rated commercial asset-backed securities and collateralized loan obligations, can offer comparable (or higher) yields with less duration risk than similarly rated corporate bonds. We believe active fixed-income management that focuses on the best risk-adjusted opportunities—whether in or out of the benchmark—offers the best solution to meeting investors’ objectives in a low-return world.

A Stock Market Crash In 2018?

My Comments: Last Monday, I posted comments from three people who said with conviction there was no reason to expect a market correction any time soon.

Today I have someone with no discernable name who says, also with conviction, that we’ll have one next year.

Here’s my take on this: if you are 60 years old or more, prepare for a correction. If you are less than 60 years of age, ignore all this, put your money to work and don’t worry about it.

Now, do you feel better?

November 7, 2017 from GoldSilverWorlds.com

The U.S. stock market is in amazing shape. Every day new all-time highs are set. This must be bullish, and investors should go all-in, right? Well, not that fast, at least not in our opinion. We see many signs that this rally is getting overextended, from an historical perspective. While we clearly said a year ago that we were bullish for this year, we did not see any stock market crash coming (a year ago). Right now, we are now on record with a forecast of a stock market crash in 2018, and it could take place as early as the first weeks / months of 2018.

So far, in all openness and transparency, our warning signals for a mini-stock market crash in November were invalidated. We were horribly wrong in terms of timing. However, we still believe there is a huge risk brewing for a mini-crash. The stronger the current rally, the stronger the fallback.

Yes, we do expect a strong mini-crash in the stock market in 2018, starting early 2018. Central banks will likely step in to avoid a similar chaos as in 2008/2009, so we don’t forecast the end of the financial system.

We do, however, believe a very stiff correction will take place, which potentially could bring a buying opportunity (to be confirmed at that point in time based on intermarket dynamics). More likely, however, we believe that money will rotate out of U.S. stocks into emerging markets. That is why we are very bullish emerging markets in 2018.

The first warning signs of a stock market crash

We published the following warning signs starting in August:
• Is Volatility Making A Higher Low Here?
• Volatility On The Rise As Expected. What’s Next For Stocks?
• Ignore This Series Of Volatility Warning Signs At Your Own Peril
• Volatility Hit Historic Lows This Week. Maximum Complacency Is Bearish!

But the number of concerning indicators is accumulating now. Yes, it may sound as foolish as it can be that right during a strong bull market rally InvestingHaven’s research team talks about concerning indicators. But let’s first deep-dive before you come to a conclusion.

The Dow Jones Industrials chart is one of those concerning charts. The area indicated with “0” shows that the index has risen with more than 30% in 12 months without any meaningful correction. This rally may be amazing, but it is reaching a level never seen before in the past 12 years (including the 2007 rally and major top). All other instances of a 30% rise in 12 months are indicated on this chart (from 1 till 5):
• The 2013 rally (“5”) was as powerful as the current one, but resulted in a mini-crash just 3 months later.
• All other rallies (“1” till “4”) resulted in a strong correction or mini-crash within or right after the 12-month rally.

The current U.S. stock market sentiment shows extreme greed, according to the CNN Money fear & greed index.

In the past 3 years, the Fear & Greed index reached similar levels of bullishness only twice. This bull run is overextended on the short-term time frame for sure.

The stock market breadth, an indicator of strength of market internals, is suggesting that this rally is driven by a minority of stocks. As the broad indexes move higher, there are fewer stocks participating in the rally. Not a good sign.

4 charts suggesting a stock market crash in 2018 based on historical data

Let’s put the current stock bull market in historical context. As the charts speak for themselves, we believe they suggest a stock market crash is brewing, and it could start as early as the first days or weeks of 2018.
The first chart shows the strongest bull markets in the last 80 years. Visibly, the current bull market, which started in 2009, is now close to being the strongest ever. The current strong rally, which comes after an 8-year bull run, is a concerning factor, according to us.

Note from TK: To see these four charts and read the short accompanying text, GO HERE:

How this Bull Market Will End

My Comments: Once again, our assumptions about the future of the current bull market are challenged. I want these writers to be right, and that too is a challenge for me. I share it with you here in hopes it gives you a better idea about what to do with your money.

By Krishna Memani, Brian Levitt & Drew Thornton | August 15, 2017

This secular bull market—the least loved in memory—is now more than 100 months old, and up by 265% from its bottom on March 9, 2009. It is also the second longest bull market on record (after the 1990s’ dot-com boom) and fourth largest in terms of market advance.

For some investors, the sheer age of this cycle is enough to cause consternation. Yet there is nothing magical about the passage of time. As we have said time and again, bull markets do not die of old age. Like people, bull markets ultimately die when the system can no longer fight off maladies. In order for the cycle to end there needs to be a catalyst—either a major policy mistake or a significant economic disruption in one of the world’s major economies. In our view, neither appears to be in the offing:

• Global growth is sufficiently modest. The “accidental” synchronized global expansion (so-called accidental because it was more of a coincidence than a coordinated effort by global policymakers) is already fading, but slowing growth in the United States and China does not foretell a crisis.

• The United States, nine years into this market cycle, has not exhibited the excesses that are indicative of typical economic downturns.

• For its part, China’s high leverage poses a threat to its financial stability, but government actions are likely to be gradual to ensure a phased pace of deleveraging while maintaining growth stability.

• We believe that low inflation globally will provide cover for policymakers to be more accommodative than many expect.

We are optimistic that this cycle will ultimately be the longest on record, though we do not believe our view is Pollyannaish. We will continue looking out for telltale signs indicating the end of the current cycle, even as we believe that none of them are forthcoming:

1. U.S. and/or European inflation increases more rapidly: If inflation picks up meaningfully in the developed world and tighter policy commences, then the cycle will likely be curtailed.

2. High-yield credit spreads widen: The bond market is usually a good indicator of the end of a cycle. Cycles end with the yield curve inverting and high-yield credit spreads blowing out. An equity market sell-off typically follows soon thereafter.

3. The 10-Year U.S. Treasury rate falls and the yield curve flattens: The 10-Year Treasury rate will reflect the real growth and inflation expectations of bond market participants. A flattening yield curve driven by the decline of long-term rates would be an ominous sign for the U.S. and global economy.

4. The U.S. dollar strengthens versus emerging market currencies: A flight of capital from emerging markets to the United States would slow growth among the former—which are major drivers of economic activity—and potentially cause another earnings recession for U.S. multinational companies.

Note: There is a white paper published by Oppenheimer Funds with 18 charts in support of the authors argument that the current bull market will not end soon. You can find it HERE.

How to pay for long-term care? Several funding options exist

My Comments: If you don’t think about it, maybe it’ll go away. But for millions of us, living longer than our parents, LTC is an insidious risk that needs to be dealt with. There is probably no best answer, just a better one.

Short of dying early, most of us will need advanced care of some kind. And like shopping for groceries or going out to eat at a restaurant, it ain’t gonna happen without a money source.

The sooner you come to terms with this, the more likely your future years will be less stressful.

Oct 9, 2017 By Greg Iacurci

Roughly half of Americans turning 65 today will require long-term care. As life expectancy continues to rise and the cost of care creeps up, there’s a growing need for financial advisers to be knowledgeable about long-term-care funding mechanisms to help clients choose the best one — or combination.

Long-term-care coverage is delivered primarily through “private” means. Roughly 55% of expenditures from age 65 through death are via these private forms of payment, with 2.7% of that from insurance and the remainder from out-of-pocket expenses, according to the U.S. Department of Health and Human Services.

About 45% of long-term-care funding is from the “public” sector, mainly from Medicaid.

Public and private options have respective benefits and drawbacks concerning expense, level of long-term-care benefits and quality of care.

INSURANCE

Traditional LTC
There are a few insurance options to hedge long-term-care risk: traditional long-term-care insurance, and life insurance policies and annuities with long-term-care features.

In 2017, the national median cost for a private room in a nursing home is roughly $8,100 per month, according to an annual report published by the insurer Genworth. An assisted living facility costs $3,750 a month.

Traditional LTC insurance is a stand-alone policy devoted specifically to providing benefits for long-term care if a need arises. This insurance delivers LTC benefits at the lowest cost and offer inflation protection, observers said.

Sales of these policies have dwindled over the past several years. While insurers sold 700,000 of these policies in 2000, the American Association for Long-Term Care Insurance estimates the industry will close out this year with 75,000 policy sales.

There’s been negative consumer sentiment in the marketplace as insurers have had to raise premiums in recent years on in-force policies due to initial policy mispricing, following a misjudgment in lapse rates and interest rates, said Jesse Slome, executive director of AALTCI. A number of insurers also have abandoned the marketplace.

Advisers typically use traditional LTC insurance if clients have a tolerance for a potential premium increase in the future and if they don’t have a life-insurance need, said Phil Jackson, insurance planner at ValMark Financial Group.

Life insurance – LTC combination
Sales have shifted more to combined life insurance-LTC products. These products drew $3.6 billion in new premiums in 2016, a 500% increase over the $600 million in 2007, according to Limra, an insurance industry group.

Broadly, advisers like the flexibility of these policies. Mr. Jackson explains it in terms of “live, quit or die”: Clients get a long-term-care benefit while living, but can also surrender the policy for a portion of their premium or provide heirs with a death benefit. The latter options aren’t available for traditional policies.

Further, premiums and benefits are guaranteed, he said.

Combo policies come in two flavors: hybrid LTC, and life insurance with LTC riders. Hybrids provide more of a long-term-care benefit and have a “very small, very modest” death benefit, whereas policies with LTC riders are more life-insurance focused, Mr. Jackson said.

One key difference is hybrids typically have an inflation-protection feature allowing a client’s future LTC benefit to grow annually, whereas the benefits are fixed in policies with riders, Mr. Jackson said.

Among LTC-related sales year-to-date at ValMark, 45.9% have been hybrid, 49.5% LTC riders and 4.6% traditional LTC.

Annuities
Annuity products are the least-used among insurance products for providing LTC benefits. Combination annuity-LTC sales were $480 million last year, up from $285 million in 2011 but little-changed since 2014, according to Limra.

The products deliver a lifetime income stream, and increase that income in the event of a long-term-care need.

“Annuities are pretty much a last resort for long-term care,” said Jess Rorar, a planner at ValMark. Life insurance products provide more of a benefit and give more value for the money, she said.

However, in the event insurers decline a client from buying traditional LTC or combined life insurance-LTC, annuities can serve as a backup because the underwriting requirements are easier, said Jamie Hopkins, the Larry R. Pike Chair in Insurance and Investments at the American College of Financial Services.

MEDICAID

“Almost every adviser you talk to has clients that end up on Medicaid. It’s just the reality of aging and living a long time,” Mr. Hopkins said.

The government assesses income and asset levels when determining individual qualifications for Medicaid. Generally, individuals have to essentially run out of money before Medicaid kicks in, Mr. Hopkins said.

Clients often need the help of an elder-care attorney to structure their assets appropriately — for example, there are several exceptions for assets, such as a home, that get protected from a Medicaid spend-down calculation, and an attorney can help protect those to the largest extent possible, Mr. Hopkins said.

Medicaid facilities, though, often aren’t as nice as those provided by private care; so private insurance would likely better protect one’s quality of life, he said.

SELF-INSURANCE

Clients concerned about asset flexibility and freedom, as well as those with an aversion to medical underwriting, are often candidates for self-insuring if they have the appropriate wealth, Mr. Jackson said.

“Generally, even if you have the assets to self-fund, you’ll get a better return on your dollars if you use an insurance solution,” he said.

Clients also “tend to have to hold a lot of assets hostage to that self-insurance,” Mr. Hopkins said. “You’re not really allowed to touch them,” which sometimes leads to a reduction of lifestyle when young people set assets aside in a separate account for LTC purposes.

One Of The Most Overbought Markets In History

My Comments: As someone with presumed knowledge about investing money, my record over these past 24 months has been pathetic. I’ve been defensive, expecting the markets to experience a significant correction “soon”…

I lived through the crash of 1987, the crash in 2000, and then the Great Recession crash in 2008-09. I saw first hand the pain and chaos from seeing one’s hard earned financial reserves decimated almost overnight.

Only the crash hasn’t happened. But every month there are new signals that one is imminent. And still it doesn’t happen.

I’ll leave it to you to decide if what Mr. Bilello says makes any sense. I’m not sure it does.

by Charlie Bilello, October 22, 2017

The Dow is trading at one of its most overbought levels in history. At 87.61, its 14-day RSI is higher than 99.999% of historical readings going back to 1900.

(Note: Developed by J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings, and centerline crossovers. RSI can also be used to identify the general trend. TK)

Sell everything?

If only it were that simple. Going back to 1900, the evidence suggests that such extreme overbought conditions (>99th percentile) are actually bullish in the near term, on average.

Come again? In the year following extreme overbought readings, the Dow has actually been higher roughly 70% of the time with an average price return of 14.2%. From 5 days forward through 1-year forward, the average returns and odds of positive returns are higher than any random day. While the 3-year and 5-year forward returns are below average, they are still positive.

Does that mean we’ll continue higher today? No, these are just probabilities, and 30% of the time the Dow is lower looking ahead one year.

What it does mean is that one cannot predict a market decline based solely on extreme overbought conditions. Declines can happen at any point in time and “overbought” is neither a predictor nor a precondition of a bear market to come.

If one is going to predict anything based on extreme overbought conditions (and I would advise against doing so), it would be further gains. I realize that doesn’t conform to the conventional narrative of “overbought = bearish,” but the truth in markets rarely does.