Knockdown Drag Out Slugfest

Blows are being taken on the chin and dished out to the gut as daily prices wildly soar or crash.  Last week, for instance, the DOW jumped and dived several hundred points before finishing up about where it started.  Here we go again.

Down.  Up.  Up.  Down.  Up.  The stock market’s bouncing around like two boxers in a slugfest.  So far the judge’s score cards report a draw.

What to make of it.  Is the bull dead?  Or is the market searching for a new toe hold to spring upward and onward?

Here at the Economic Prism we have our money on the bear.  We see a slow growth economy that never really recovered from the Great Recession.  At the same time we see a stock market that’s been over inflated by radical monetary policy.

Extreme interventions into capital markets have pushed up assets and ballooned the accounts of the wealthy.  The wage earner has been left behind…median income is still below where it was in 2007.

A Losing Proposition

Eventually this divergence between asset prices and the real economy will come back into line.  We don’t think it is likely incomes will significantly rise.  The most likely way things will come back together is for stock prices to fall – a lot.

Staying out of harm’s way is our suggestion if you’re an investor.  If you’re a trader, these wild swings can help or harm you depending on how well you make your guesses and place your bets.  Regardless of your stock market objectives, the next stretch will be exceedingly difficult.

“It is hard to decide when the stock market has peaked and it is time to get out,” says professional market observer Mark Hulbert.  “It may be even harder to know when the damage is over and it is time to get back in.

“But pulling off both in succession is exceedingly rare.

“This would be important to keep in mind at any time, but especially right now as the bull market that began in March 2009 is entering its 54th month.

“Since peaking on July 24, the broad stock market — as measured by the Wilshire 5000 index — has fallen 3.7 percent.  Even if the market has topped out and you sidestep a decline by getting out of stocks now, the odds of long-term success still are against you.

“Trying to time the market is by and large a losing proposition, even for the pros.”

Knockdown Drag Out Slugfest

No doubt, the market’s engaged in a brutal slugfest.  We recognize the futility of trying to time the outcome.  If the pros can’t consistently do it, why should we bother trying?

But that doesn’t mean one always has to be all in.  Neither does one need to be all out.  However, given the budding likelihood of a significant correction, lightening up your portfolio of stocks to just a few core holdings and storing up some cash makes sense.

That way you can sleep at night.  You’ll have some cash available to scoop up the many bargains if stocks crash.  If stocks keep rising, you’ll still get to participate in some of the upside.  Though this may not be as profitable as getting out at the top and buying at the bottom, as Hulbert’s found, “pulling off both in succession is exceedingly rare.”

Yesterday something else exceedingly rare happened.  The DOW didn’t go down.  But it also didn’t go up much either.  When it was all said and done the DOW closed up just 16 points.

When it comes down to it, the bull and the bear are catching their breaths.  The forces of extreme monetary policy and economic lethargy are squaring off for the later rounds.  In the end, it’ll be a knockdown drag out slugfest.  Hardly a soul will see it through with their capital intact.

Sincerely,

MN Gordon
for Economic Prism

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