Why We’re Waiting to Put Money to Work

It always happens whenever the stock market rockets higher for a sustained period – without any pullbacks.

My email gets flooded.

Readers ask, “Why aren’t we buying more?”

The FOMO Is Very High

Every day the market moves higher, investors get more concerned about missing the move. If they’re not 100% invested, or 100% leveraged on margin, they feel like they’re falling behind.

Their friends and neighbors are getting rich. All the talk at all the holiday parties is about how much money everyone is making and how much more they’ll all make as the market presses even higher.

Of course, nobody says anything about risk. Nobody wants to be “that guy.”

So please… allow me…

Here’s My Warning for You

Now is not the time to be buying stocks aggressively. Now is the time to trim positions. There is far more risk in the stock market right now than most folks are considering. And, the potential rewards to buying stocks here are quite small.

The S&P 500 has been on a one-way train higher since bottoming in October. The index has run from 4100 to 4725. That’s a 15% gain in two months – with almost no pullbacks along the way.

It is dangerous to be chasing that move.

The last time we saw similar action was in the summer when the S&P 500 ran from 4200 at the start of June to 4600 at the start of August. The market gave back all of those gains, and then some, over the next three months.

Ironically enough, the last time my email was flooded with so many desperate emails was in late July, just before the market peaked. It was a time of peak-FOMO (fear of missing out). You can read the essay I wrote about it at the time right here.

The technical condition of the market right now is quite similar to how it looked in late July.

Conditions are overbought. The VIX is trading at its lowest level in three years. Investor sentiment (a contrary indicator) is off-the-charts bullish. And, stocks are rallying every single day.

Remain Cautious

I can’t tell you when this rally will end. It has been much stronger than I was expecting. But, I do know that right now is a dangerous time to be adding exposure to most stocks. The pressure to get in is almost unbearable.

But, paying 22 times forward earnings for the S&P 500 when conditions are as overbought as they are currently is not a good idea.

It might feel good for a day, or a week, or a bit longer. Ultimately, though, it will produce sub-optimal returns.

Yes, I’ve been arguing for caution for a while now. But, I am adamant about this. Now is not a good time to be buying most stocks. The risk far outweighs the reward.

I’m not calling for a crash. But, we could easily see a 5% pullback – just for the S&P to test its 50-day moving average line as support. And that would give investors a much better place to put money to work.

Best regards and good trading,

Jeff Clark