The rally’s speed has left savvy investors in a quandary. While few are willing to bet against a rebound that has steam-rolled most forecasts, we are concerned the market has become detached from economic reality by expectations of unlimited support from the Federal Reserve and U.S. lawmakers.
We are not fundamentalist in our rules of trading. But this market has defied all our rules for placing buy or sell orders. Therefore, placing buy orders or short orders would require us to have issue stop prices with 8 to 10 percent swings. That is not an acceptable risk for our portfolio and subscribers. We have been in cash for a while and we need time for this market to settle down. Then, we can have an acceptable base for stops and risk control. The volatility and price gyrations are way too high.
Looking at SPY (S&P 500), which is our main core trades, it now trades at 22 times earnings, its highest level since 2002, even as unemployment is at levels last seen in sever recessions.
We are in a quite different game now and, one that we have never experienced in 40 years of trading. It is a US government sponsored bubble to keep the markets propped up. There will be lots of surprises soon, some pleasant some not so much. The split between wall street and reality is unlikely to last.