Market risk is high, take some profits and look for value!

1-For the last several years the stock market has rewarded investors in many stocks; however we always emphasize that from time to time, profits should be taken. Keep in mind that the largest percentage of the profits are taken by the professional traders and trading desks.   

   The market volume and direction  is dominated  by high frequency trading and hedge funds which are estimated to be 80% of the overall volume.  Over the last twenty years, trading volume has increased as a percentage of the overall volume. The market is heavily trader influenced.

2-We have expected the stock market to have suffered 20% to 25% corrections over the past five years each time to be followed by rallies to the upside, those corrections did not occur. Those normal corrections would have prevented the stock market from its current extremely high overall valuation for the overall stock market but also for many of the highly touted stocks.

3-Most importantly, severe corrections offer investors whether institutional or individual exceptional opportunities to invest in shares at lower prices while they are “on sale.” Unfortunately the stage is now set for another possible brutal bear market. We are not short sellers but various indicators strongly suggest caution and possibly a severe bear market.  Yet, we have many stocks that we will be buying if they decline to our buy levels.

4-We have said many times, odd as it may seem,  bull markets do not end due to overvaluation. They end with interest rates rising, often with a decline in the money supply and an economic slowdown. But note well that risky market tops are usually accompanied by overvaluation.

5-We are often asked if the U.S. Federal Reserve Bank is involved in the stock market. Yes! We are convinced that the Fed is heavily involved in the American stock market. Most of the world’s Central Banks are heavily invested in their countries’ stock markets and acknowledge it. The Fed knows quite well that the U.S. and the world cannot afford a bear market.

6-Near zero interest rates and QEing have been key enablers supporting the stock market allowing the  market to move to overvalued levels. The QEing  in our opinion, is artificial and  carries with it the fact that many investors are often required to pay higher prices for stocks.

7-While we always are generally fully invested in stocks, we see enormous risk in many of the highly recommended stocks. Those are the favorites of the brokerages and the high frequency traders and some hedge funds. Opportunities for exceptional capital gains are always present but far too many stocks have been  recommended at the very high end of their valuation range.                                                                                        An old rule is to focus on what is undervalued and not what is popular. Again, many of the best performing stocks have been  selling at extremely high valuations; that will end sadly. “Paying up” for stocks often leads to disaster.

8-INSIDER SELLING… For the last three months we have seen the LARGEST AMOUNT in dollar value of officers and directors selling their personally owned shares at the highest rate and amount in history. Three weeks ago we saw the largest dollar totals of officers and directors selling their own personally held shares in the companies where they are employed.  Their stock sales totaled an astounding value of   $1,699.000,000 … that’s about  $1.7 billion! while buying was $39,746,064, quite a contrast. These sell levels in the past have always been concurrent with the beginning of what led into brutal bear markets.

9-The value of publicly traded U.S. stocks to U.S. Gross Domestic Production is now over 140%. While not a “timing signal,” the last two brutal bear markets have commenced from these valuation levels in 2000 and 2008.

10-Since 2009, S&P 500 companies have spent more than $4 trillion, yes ($4,000,000,000,000) on Share Buybacks. A share buyback occurs when a company buys its own stock in the market to lend support to its share price. Few people are aware that “Buybacks” have been a major part in keeping the stock market and many individual stocks at overvalued levels. With today’s value of the S&P 500 stocks at $23 trillion, we believe that the “buybacks” add at least 10% to 15% to the value of the S&P 500.

11-Yet there are numerous companies and sectors that are quite undervalued that offer opportunities for exceptional capital gains.  We favor gold and silver mining companies which in most cases are selling at their lowest valuation levels in history.

12-NEVER BE AFRAID TO TAKE PROFITS AND LOOK FOR STOCKS THAT ARE UNDERVALUED. SIMPLY INSIST ON VALUE.

Thank you, K.C. Grainger and Bob Pellerin