Now is your chance to sell.
Actually… it’s your second chance.
The market has staged a remarkable recovery. After peaking near 5650 in mid-July, the S&P 500 dropped to below 5200 in early August.
It was a fast, hard drop. The action scared a lot of investors – and sent the Volatility Index (VIX), Wall Street’s fear gauge, above 65.
In my video update on August 8, I mentioned that traders who missed the chance to sell stocks at all-time-highs in July shouldn’t be too disappointed. They’d likely get a second chance to do so.
Now is that chance.
Your Second Chance
While the stock market’s recovery has been a lot faster than I expected, it doesn’t change the outlook. At 5640, the S&P 500 is trading at 23 times forward earnings expectations. That’s expensive. It’s at the upper range of its historic valuations.
“But,” the bulls will argue, “the Fed is shifting to an easy money policy. They’re about to start cutting interest rates. And, that’s bullish for stocks.”
But is it, really?
Think about this for a moment…
On Friday, the Chairman of the Federal Reserve Board, Jerome Powell, gave a speech at the annual summit in Jackson Hole. He made it clear the next direction for rates is lower. And, the market immediately priced in at least a 25 basis point cut in September, and a total of 100 bps by the end of the year.
Yippee.
The computers went into “buy mode.” The S&P 500 added even more to the rally it had been on for the previous two weeks. And, the market closed within spitting distance of the all-time-high from July.
Because, as everyone is saying, lower rates are bullish for stocks.
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Remember… History Rhymes
Some of us older traders, though, will remember the last Fed rate-cutting cycle – which took the Fed Funds target rate to 0% and kept it there for several years.
That cycle started with the first rate cut in September 2007. And, the final rally associated with that cut took the stock market to all-time highs.
Then came 2008 and the Great Financial Crisis – which cut the S&P 500 in half.
I’m not saying we’re headed towards the same fate this time around. But, I am suggesting that history rhymes.
And, maybe we shouldn’t get too excited about buying the S&P at 23 times earnings when the Fed typically only lowers interest rates during difficult economic times.
So… if three weeks ago you were fretting that you didn’t sell some stocks at the all-time highs in July, you now have a second chance to do some trimming. It would be unfortunate to be fretting about the same thing a few weeks from now.
Best regards and good trading,
Jeff Clark
Editor, Market Minute