Last week I predicted the Dow Jones would break the record set way back in the Reagan era for the longest winning streak of closes at 13 days. As of this writing, that record is now shattered. And it wasn’t just shattered, yesterday’s Dow average set another record when it crested over 21,000.
With the markets climbing ever higher, I’m even more confident that we’ll hit a ceiling and stocks will come diving down once investors take the cue and start realizing profits. As I said previously what goes up must come down, and the corollary to that investing rule is that the higher it goes the closer we are to a correction.
Last night’s first address to Congress for President Trump demonstrated all the more the confidence investors are putting in his administration’s commitment to protectionism and equally the trepidation of an unbalanced, global free-trade regime.
He also doubled down on his commitment to rebuilding the nation’s crumbling infrastructure with a request to Congress for $1 trillion in spending. That amount would dwarf the appropriations authorized for President Eisenhower’s infrasture program on which we’re still relying more than half a century later.
The commitment to balance trade in the direction of American economic interests coupled with a commitment for massive domestic spending would clearly send investors into a dizzying spell of optimism. And they responded the next morning with a buying spree. But here’s the problem with that…
The higher prices climb the more over-valued they become, and we’ve all seen just a decade ago what happens when a market based largely on paper gets mugged by reality. History has shown over and over again that this is not mere speculation but rather a simple question of when.
Look at it like an airplane that, rather than finding a comfortable cruising altitude, continues to climb… at a rate of ascent that must soon become unsustainable. As a member of the Air National Guard, I can tell you that there is a ceiling beyond which no amount of thrust can keep a plane aloft at extreme altitudes. What happens when it reaches those altitudes? It stalls out and begins a dive…quickly.
That is more or less the same phenomenon we see happening in the stock market routinely throughout history. And it will happen again, and in the not-so-distant future.
What could possibly trigger that dive? There is a near-infinite number of possibilities, but let’s consider just a few. A major terrorist attack on U.S. soil similar to 9/11 could cause investors to stampede for the exits. A medium-sized conflict in the Middle East could flare up constricting oil supplies and, again, spook investors. An announcement by the federal government of stalled first quarter growth and/or lower-than-expected labor participation rates could be a trigger.
The key here is recognizing that a triggering event by itself won’t have any demonstrable impact on actual economic activity. All that is required is that the triggering event causes just a little bit of fear in a proportional number of investors. Once those investors begin selling as a ‘precaution’, other investors will assume there’s something they don’t know and should follow suit. And that’s when the sell-off ensues. It feeds on itself. I could see a 21,000 Dow come crashing back down to 17,000 or less.
Does that mean it’s time for you to run to cash? No. My message here is cautionary… a yellow alert. In other words, be ready to profit whether the ascent has a little more thrust available or if the engine stalls and a short-term plunge takes over. For many investors, it seems easy to make money when the markets seem very biased in only a bullish direction… especially when we’ve become accustomed to a seemingly endless bull market over these many years.
But reality smacks almost everyone when that easy momentum ceases. And every bull market ceases. Paper profits made over many months in the run up to Dow 21K can evaporate quickly for those married to a perma-bull mentality. Don’t be one of those. Complacency can make some just watch their accumulated gains evaporate as they keep expecting a relatively long-term bull market to pick right back up. The catch is that it doesn’t always do that. And short-term fortunes vanish.
Bailing out to cash isn’t an optimal answer either. Instead, it’s a great idea to brush up on how to make money on falling stock prices. One way is what is known as shorting stock. Another way that I favor in most situations is buying put options. Those who understand these bear market tools are the one’s celebrating when the bear reclaims the markets. In other words, while most people are despairing over the erosion of what can be months or years of gains realized in the bull market we’ve all been enjoying, agile investors who position themselves properly can significantly increase their cumulative gains by making money as stock prices fall.
Do you know how to do that? If not… or if you are unsure… email me at [email protected] and I’ll cover it in a future column. It’s knowledge that every smart investor simply must have. Otherwise, it’s limiting profit potentials to only one market scenario. And why do that? Some of the best profits that investors can make ARE MADE in bear markets. Such markets are usually harsh, making large moves very quickly. The panic spreads and accelerates the fall. Know how to take advantage of such falls and you can make a lot of money very quickly.
I’m expecting just such a correction in the near future… and probably several good ones on route to my longer-term forecast of Dow 30K. Be ready to profit from those corrections and agile enough to buy back in as the bear bottoms out and the bull resumes. If you don’t know how to do that, speak up now by emailing me- [email protected] – and I’ll cover this topic well in a future column. It’s not a lesson to try to learn as the market is melting down. Be proactive so that you are ready to act with confidence when the time is right. It’s coming. It’s editable. And there will be a great deal of profit in it for those that know how to capitalize on it. Are you one of those of people?