Avoiding deep losses requires investors to recognize that market risk sometimes isn't worth taking, particularly when stock valuations are rich and competing yields are rising. On average, about 40% of the gains in the typical “bull market” are wiped out by the subsequent “bear market,” though the individual figures vary widely. The retracement from rich valuations is often deeper. Unless one believes that market turns can be precisely identified and that short-term market forecasting is a fruitful effort (I don't – good managers know their skills but aren't unrealistic about them), it turns out that it is often necessary to forego some portion of bull market gains in order to avoid periods of substantial market loss.
Here's a historical fact that I don't recommend as a timing tool or investment strategy, but is true nonetheless. Had an investor sold the S&P 500 index anytime it reached a price/peak earnings ratio of 19 (i.e. 19 times the highest level of earnings achieved to-date), and then simply sat in Treasury bills, possibly for years, reinvesting in stocks only when the S&P eventually declined to 14 times earnings, that investor would have captured the entire historical return enjoyed by S&P 500, with substantially lower volatility and risk exposure.
Even easier, suppose that an investor sold the S&P 500 at 19 times record earnings, and just sat out of the market until the S&P 500 eventually dropped 30% from its prior highs (say, on a weekly-closing basis). Nothing more. Just sell at the first point of overvaluation and then sit around waiting for a plunge. That strategy would have placed an investor out of the stock market nearly 30% of the time, yet would have produced total returns of 13.03% annually since 1940 (versus 11.90% for a buy-and-hold approach), and 13.67% since 1970 (versus 12.96% for a buy-and-hold).
Read the rest of it, but also note: as of today, DIA is over 25X earnings, and SPY is almost 25X.
The market is slated either to go way up or way down next week:
SAN FRANCISCO (MarketWatch) -- Stock market bulls hope economic reports in coming days will show inflation concerns that have dented equities recently are overdone.
But bears fear the data could confirm growing worries that high energy costs and a falling dollar will lead to more inflation and interest-rate hikes, crimping corporate profits and consumer spending.
A Tuesday report on April producer prices and a consumer price reading the following day will be closely watched, as will housing data and industrial production numbers, also on Tuesday.
"If these indicators counter the prevailing inflationary story, then the market can rally again," said Barry Hyman, equity market strategist at New York-based broker dealer Ehrenkrantz King Nussbaum. "If these data points corroborate inflationary concerns then the correction continues."
On Thursday, stocks logged their biggest one-day decline since January, drubbed by worries that rising commodity prices will translate into higher inflation and prompt the Federal Reserve to raise interest rates again in June. ...
While the market has managed to recover from similar, short corrections this year, Hyman isn't optimistic this time. On Wednesday, his firm began advising clients to sell stocks into strength and jettison holdings that have performed well recently.
I have for now sold IGE and IYF, and the basic materials ETF. The money was nice. Let's see whether the Bush bust continues next week.
Incidentally, Thinkprogress notes that "Fox News'" take on the tanking market was "the market was peeved over the spy scandal."
You could have been reading my blog and making more money, and I don't know much more than squat about the market. Anyone who's been really following this knows that the market dived because the Fed indicated it would keep raising rates (giving a "measured" decline in the dollar instead of a rout.)
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