Has The Stock Market Peaked…Again?

The New York Times put out an article last Friday about individual investors getting back into the stock market. The AAII Bullish Sentiment is at the highest since January 2011. Typically this information is a contrary indicator. Historically retail investors get into market at the top and sell stocks at the lows – Buy high and sell low.

One of the unique privileges I have with this blog is that it is also a Zeitgeist of investor sentiment. In the past month, I, too, have seen an increase in visitors to my broker reviews and stock broker promotional sections. More individuals are signing up for stock broker accounts, and en mass. They did more in January than even for the Facebook IPO. More so than other years when this is typically New Year’s resolution time. While it gives me some faith the economy is still growing somewhat, is their timing off? Have the missed the boat?

What I do find interesting about this change is why all of the sudden now? Is it because we have removed all uncertainly? I don’t think that’s the issue. We still have concerns about Europe, historically high unemployment, higher taxes than previous years, a debt ceiling debate, and possible sequesters.

I think it’s more because we are getting very close to some “magical” numbers in the stock market indicies. Individual investors are feeling they missed out on the party. The S&P 500 is close to the all time high set in October 9th 2007 of 1,565.15. The time previous to 2007 it past 1,500 was in March of 2000!

The Dow Jones peak hit at 14,164.53 that same October day in 2007. At the time of this article (January 28th 2013), the S&P 500 is at 1,499.15 and the Dow is at 13,874.90. I find it interesting that individual investors are only getting back into the market as we get closer to the all-time high.

Mind you, I’m not calling this a top in the market, nor making the statement that individual investors are getting in at the worst time. While the market itself isn’t cheap, it’s not outrageously priced either. It’s very possible the market will go significantly higher, but it may not either. What I’m saying is the easy money has already been made.

It’s been three years since our last “official” recession. Recessions historically happen every 3-5 years. Economic expansion doesn’t happen forever. So it’s possible we may see one in the near future. However, it’s almost impossible to time the market and predict when this exactly will happen.

The main reason why investors are putting more money into the stock market comes down to this question – where else do investors have to go? With bond rates as low as they are because of FED policy, we are pretty much Pavlov’s dog. We are being forced into riskier assets because most alternatives, to put it simply, suck.

Total Equity Flows

courtesy of BofA Merrill Lynch Global Research (click to enlarge)

Like previous times, the retail investors that are just starting to move assets from bonds to stocks already missed out in an huge run up. Warren Buffett has this aptly appropriate quote:

“Be fearful when others are greedy and greedy when others are fearful” — Waren Buffett (Click To Tweet)

Since March of 2009 stocks have risen over 120 precent. Since January 1st, they are up 5% alone.

If you are nowhere near retirement, keep doing what you are doing. Don’t worry about what I’ve just said. Setup your asset allocation, and keep putting money into your account monthly. Any pullback in the market now will not affect you dramatically 10, 20 or 30 years from now.

You typically invest in the stock market for terms longer than five years. If you are less than five years to retirement or some other near term goal, you may want to take some money off the table.

I’m assuming you piled into stocks since the market lows. If you have, it might make sense to be a little fearful now while others are greedy. You’ve already had a decent run. In fact, one of the best in recent history. We may have not hit a market top yet, but we certainly are not at a low point.

Readers: What do you think? Do you believe the stock market will go higher or lower? If so why?

Comments

  1. William @ Drop Dead Money says:

    Some things are hard to predict, especially the future – reputedly an ancient Chinese proverb. My inclination is to think that the market is headed higher. As you pointed out, the fixed interest bearing alternatives are unattractive, especially since it looks like interest rates may have bottomed, pushing down bond prices. As bond investors flee for the exits, it seems they pretty much have only two places to go: real estate and equities. We can see the property price recovery gain momentum smartly, and I believe stocks will tag right along.

    In fact, if the Fed goes on QE’ing as they are, we could even see an inflationary bubble focused on real estate and stocks. If that happens, we can see the S&P 500 do things that have never been done before.

  2. Brett @ wstreetstocks says:

    It’s quite tragic that the retail investors are always late to the party. They lose money and then they have a negative opinion of the market. The market definitely has the potential to go much higher in 2013, but it appears to have peaked for now because of the return of the retail investors.

  3. Brick By Brick Investing | Marvin says:

    One cannot predict the future, trying to do so is absolutely ludicrous. What investors should focus on is identifying great businesses and buying them for cheap. There are still bargains out there but very few. I use to get all worked up in who was in the market and who was out. If someone forced me to make a prediction I would tell you that the market will march considerably higher due to massive amounts of new currency in circulation over the past 5 years and the fact investors are witnessing higher stock prices.

    I personally love situations like this. I will likely continue to trade (not invest there is a difference), build cash, and pay down the mortgage on my house. What will inevitably happen is the herd will swarm into the stock market and get slaughtered once again. I’m thinking the dot com bubble all over again.

    What are you currently investing in?

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