Though the current economic expansion is five years old and the average expansion since 1960 has lasted only 11 months more than that, I doubt this means the bull market in stocks is about to end. So I’m a fan of staying the course with core, long-term stock holdings right now.
But if you have a lot of trades on, or if like a lot of people you have a lot of margin in your account, it’s time to trim positions.
The odds are growing, in my view, that we’ll see a stock correction near term, meaning over the next several weeks. Here’s my reasoning.
1) We just learned that the Investors Intelligence Bull/Bear Ratio moved up again this week to 3.77. That’s a five-month high. Generally, anything above 3 is a warning sign, for me. By the way, the last time we had a significant pullback was…you guessed it. Five months ago.
2) Though this is harder to measure, my sense is that the media have shifted from offering lots of warnings about a pullback to exhibiting far less concern that a pullback is likely. As a journalist I hate to say this, but it’s true that media commentators are often good contrarian indicators. At the very least, there appears to be a little less of the classic “wall of worry” around for stocks to climb.
3) We are about to move into earnings warning season. Negative surprises and downward guidance by a few big companies is often all it takes to send investors to the exits. Especially when they are more vulnerable to such negative news because there’s an elevated sense of complacency (see bull/bear ratio, above).
4) We haven’t really had a good correction in awhile. So we may be due for one to bring a healthy sense of fear back into the markets.
5) Interestingly, three of the last four significant pullbacks happened during earnings warning seasons (January-February this year, September-October last year, and June-July last year.)
6) If oil stays elevated, investors may soon start to worry that higher gasoline prices will hit already-weak consumer confidence and consumer spending, and jeopardize the recovery.
Of course, I don’t know for sure that we will see significant downside volatility over the next several weeks. But I do think it is time to trim risk in your portfolio by reducing margin and cutting back on trading positions, especially if they have grown outsized in your portfolio (two recent Brush Up on Stocks picks advanced about 40% in the past five days, most of my favorite biotech names are up that much since March-April, and virtually all of my energy names are up 12%-17% since I suggested them February-March).
As I said, I don’t think any of this means you should sell core, long-term positions now and realize taxable gains, or run the risk that you might not get back in. That risk is significant, because market timing is notoriously difficult.