The first two months of 2013 have seen the bull market in full swing. Day after day there have been outstanding gains in the market and it appears that there is a significant amount of money flowing into equities. While driving down to Florida last Friday I listened to some of the financial channels and all they could talk about was the influx of money entering the equities market. I’m not complaining, not by a long shot, I love my gains as much as anyone else! But I have to wonder how many investors are pouring money into a market that may have reached or is approaching a peak? If any of us are buying into this up market are we running with the bulls or running with the Lemmings towards the cliff edge?
There was a recent article in “The First Million is The Hardest” Investing Experts Herd Mentality on the herd mentality that is worth reading if you haven’t already. The article focuses on the herd mentality and how investors are pouring money into this bull market and questions the wisdom of all that money pouring into a market with “record five year highs”. I have to agree with the author 100%. I can’t help but think that the “herd mentality” is doing more to keep the market up then any sound economic news.
Here are some of the things that concern me with this run on the market:
Payroll Tax Hike – Yes, I know, technically it wasn’t a tax hike, it was a tax holiday. But once someone gets used to seeing that extra money for two years, they come to count on it. When it disappears from their paycheck, something is going to give. More likely than not the hole is going to be filled from discretionary spending. Quite simply, the average consumer is probably going to spend less now than they did in December.
Gas Prices – The average national gas price is $3.81 as of Feb 18 2013, that’s a 44 cents increase as compared to the average national price of gas on Jan 7th. ( U.S. Energy Information Administration). Families and individuals are going to drive less and many of the economic “experts” are predicting that this will equate into less retail spending (I’m not too sure about that, I just don’t see the average American family huddling around a candle wishing they could go to the mall). But, this sudden surge in the price of gas will certainly have an impact on an already shaky economic recovery
Health Care – As Obama care phases in, small businesses are going to suffer. The cost to small business is going to be significant enough that many small businesses will be making some hard decisions. Reducing their work force or not hiring additional manpower is probably one of the first steps they’ll take. I’ve already heard several radio experts discuss how small companies are in the process of throwing in the towel, approaching large companies that they have ignored in the past and asking if there was still a deal possible to get bought out.
Gold, Gold is bouncing around and close to a 3 year low. This has been widely attributed to investors pulling their money out of gold and putting it into equities. I’m no expert, but when investors are abandoning the steadfast “gold” to jump into equities, I look at that as classic “herd mentality”.
I’m not a pessimist by any means and I don’t want to be seen as the ‘Chicken Little” of the PF community, But, I’ve been burned too many times in the past too not be wary when the equities markets charge upwards like they’ve been in the last month or so. One of my key portfolios has done extremely well, and I’m glad that it has! But I’m taking the steps necessary to protect the gains I’m seeing in there. I’ve pulled some money off the table, selling and recouping the original investment from some securities that have done extremely well.. I’ve been putting trailing stop losses on some other equities in my portfolio. I’m making sure that I have some protection built into my portfolio to retain some of the gains should the bull market retreat and the lemmings start falling off the cliff.
A quick afterword. I drafted this post with the intention of finishing it and posting it this weekend or early next week. I’ve accelerated this as I think the market performance of yesterday and today warrant that I post this sooner than later. The DJIA lost 108.31 points yesterday (2/20) and finished today 46.92 points lower (2/21). Are we seeing the beginning of a correction? I don’t know and the reality is that no one can accurately predict whether we are seeing the start of a correction or not. It’s possible that this can turn around and blow past all records in a day or two or that it is in fact a correction and we’ll see further declines. The thing to remember is that all Bull Markets will eventually have a correction. Your investment behavior during the Bull and during the correction shouldn’t change because of what the market is doing. Follow your strategies and make sure that part of your strategy is protecting your gains and taking advantage of price drops.
Tell us if you’ve been taking steps to protect your portfolios. Have you taken anything off the table? Are you using stop losses? Have you done anything else to protect your investments?
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