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The average investor is getting excited about the stock market once again. This is, of course, after the markets have already doubled since the lows set in March 2009. The "buy the dip" mentality is on again for many investors, too, as the words "fear" and "risk" dissipate from many participants' vocabulary.
There are many ways to measure sentiment, but in the end, market price is truth. The truth is that despite rising oil prices, gold and other commodities being near all-time highs and housing prices still mired in a downtrend, the stock market continues to rise.
To what do we owe this high degree of optimism? Is it due to an accommodating
that continues to pump an average of $4 billion to $5 billion a day into the system? What will happen in June when that flow is turned off and when will the market start discounting that event?
Or, could it be the droves of individual investors now attempting to play catch-up? This seems to be true, as I'm being asked -- at a frequency not since the highs back in late 1999 or early 2000 -- what I think of the stock market action now. (Not that my personal experience makes this an official census, but I have been in the industry more than two decades and have been through several market tops and bottoms.) The public chatter appears more similar to a top than a bottom.
Clearly, corporate profits have improved dramatically. Auto sales are much better and retail sales have been great. Another question is how much of those higher profits are attributed to cost cutting? Are auto sales anywhere near their all-time highs? Finally, how much of the retail sales expansion is attributable to population growth?
The markets set a near-term top on February 18, and a small correction followed. We are now trading in a range with a strong market day followed by a weak day on a back-and-forth basis. The charts look like the prices are on a yo-yo. In this environment, it is best to position yourself on both sides of the market. Anticipating two potential outcomes rather than hoping for one is prudent money management.
When the market finally signals a clearer direction, lifting the side of the trade that the market goes against for a small loss would be the course of action to take. If you invest for only one outcome and are wrong, more significant portfolio damage may be incurred.
Bonds have become very oversold, and only a few bond bulls remain. Even noted bond guru Bill Gross of Pimco has proclaimed that bonds are facing trouble. The
iShares Barclays 20+ Year Treasury Bond Fund
has dropped more than 17% in the last several months as investors have begun to shun bonds. TLT put in a low of $88.14 a few weeks ago on February 9. The charts show that it may have broken out from a near-term downtrend and could stage a counter-trade rally to $98 per share, almost 10% higher from here.
Paying monthly distributions at an annualized rate of 4.4%, the total return on this trade could be rewarding should the stock market pause its uptrend and experience an overdue correction. Place a stop on TLT at $87.20, which is below the low of its last three years.
Markets have a funny sense of humor, rarely performing the way the majority would like. The "contrary to popular belief" trade right now is to buy the long bond. TLT provides a low-risk opportunity to capitalize on a stock market correction as long as the stop loss is honored.
At the time of publication, Slusiewicz held a position in TLT.
Jerry Slusiewicz has over two decades of professional investment experience. He has worked with individuals and institutions to manage monies for both short and long-term investment horizons. This extensive experience through various stock and bond market cycles enables him to offer a unique blend of professional investment counsel and personal service.