By nature people are followers rather than leaders. The rally for bonds, REITs and high-dividend stocks, such as utilities, consumer staples, and telecommunications stocks, has created a dangerous complacency among flock traders and their financial advisors. Their belief is that even if they don’t enjoy huge gains, they’re in safe assets and have little risk of a major loss. They don’t realize that they are investing in an asset that has already doubled in price since mid-2009 (For example XLP), and therefore is unlikely to continue in this upward trajectory. There just isn’t that much more room left for capital appreciation. These investors have no idea about the future and the inevitable 40% pullback in their favorite stocks.
When the price of an asset extends so far from its fair value, it must ultimately revert to the mean. In most cases one extreme usually swings to the other extreme where price falls below the fair value due to panic and fear. That is the perfect time to buy.
Sooner than later, once all the late comers to this so called “yield-driven” party are fully invested in order not to miss the rally, the bubble will burst. These folks are the least informed and most emotional investors. They always lose the most amount of money because they end up being the last to buy any asset and hold onto the asset as it suffers an eventual post-bubble collapse. Ultimately they just cannot take the fear and sleepless nights so they will fire sell everything in their portfolio at massive losses. Usually that will be when the next bull market starts again. This phenomenon has repeated itself historically in the free market world, be it stocks or real estate.
So be careful at this stage of the market and only look for an asset that is presently the least favored. Those assets would be commodities.