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It seems as though nothing can stop the market from reaching historic heights on a daily basis.
The S&P 500 is now up over 185% since its March 2009 low and it has been almost three years since the major market benchmark experienced a 10% stock market correction.
And now, at 62 months and counting, the S&P 500 is only two months away from the longest bull market run in over 85 years.
But before we start throwing all our cash at the market, I think you should be aware of three underlying factors that are going on in the background that no one seems to be talking about.
- The ratio of assets invested in equity funds versus “safe” money market funds recently hit a historic high according to the Investment Company Institute. For every $1 invested in money markets there is $4.05 invested in stocks.
As you can see in the chart below the last two times we saw ratios this high were back in 2000 and 2007. Both occurrences led to longer-term declines.
2. According to a recent article in the Wall Street Journal, over the past several months, 75% of all IPOs announced in the U.S. were companies losing money. The only other time we’ve seen this high of a percentage is back in early 2000.
The fact that so many companies are rushing to list their shares on the exchanges is troubling. When a company decides to go public and thereby list shares, they are willing to sell a portion of their future earnings to the public, and institutions for that matter, in exchange for a large payday. So, this means that the public is willing to invest or better said, speculate, in companies without a proven, profitable business model.
3. Lastly, the S&P 500 has pushed into an overbought state over every time frame. Just look at the RSI (5) and RSI (14) below.
The RSI is an overbought/oversold mean-reversion indicator that compares the performance of an equity or index – in our case a highly-liquid ETF – to itself over a period of time. Basically, the RSI allows us to gauge the probability of a short to intermediate-term reversal. Of course, it doesn’t tell us the exact entry or exit point, but it helps investors to be aware that a reversal is on the horizon.
And as you can see in the chart above, the S&P 500 is in an extreme overbought state. In fact, we haven’t seen an overbought state like this in quite some time.
As an options strategist, I’ve recently encouraged investors to take a look at using collars, vertical spreads, covered calls and selling puts. All three are wonderful ways to profit in a flat, bearish or even slightly higher market.
One thing is certain, the doom-and-gloomers have been calling for a market crash for months now. And they’ve been wrong every time.
But now we are seeing real indicators popping up, that for some reason, the talking heads have avoided discussing recently.
Bottom line is that none of us know when (or if) a stock market correction is right around the corner and the best we can do is stick to our investment plan. As I stated before I recently wrote several articles highlighting options strategies that will protect your capital if a major stock market correction occurs. I’ve also included several videos highlighting a covered call and put selling strategy that will also help dampen portfolio volatility (with a focus specifically around dividend stocks).
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