Present Conditions and Negative Outcomes

There are certain things in life a reasonable person knows they should not do.  These are things so obvious, evident, and elementary they do not require learning.  They go without question.  They don’t have to be tested for confirmation or denial.

For instance, a person should not give a Hells Angel biker the middle finger.  Nor should they play chicken with a semi-truck.  Above all, a person should not stiff the IRS…unless they want the holy wrath of the federal government bearing down on them night and day.

Likewise, the proven way to make money in the stock market is to buy low and sell high.  Everyone knows this.  Yet, despite most people’s better judgment, they have the uncanny knack for buying high and selling low.  Of course, greed and fear have something to do with this.

When it comes to markets other than capital markets people are generally capable of making accurate price-to-value judgment.  Through everyday experience everyone knows when they’re getting a good deal on a turkey sandwich.  So, too, they know when they’re getting ripped off.

But with stocks, the more prices rise…the more people’s brains turn soft.  The worse the deal for a share of a company’s stock becomes, the more people want it.  The further prices rise the more this positive feedback self-reinforces bad decision making.

When to Buy and When to Sell Stocks

Today, people will line up to buy shares of Apple stock at $700 a pop like they’re lining up for funnel cakes at the county fair.  But they’ll thumb their nose at Microsoft at just $31 per share.  As far as Apple’s concerned, who knows if it’s still a buy?

It is always possible to buy high and sell higher.  Perhaps Apple could double again from here.  It’s not impossible.  In fact, if it does it will merely retrace Microsoft’s trajectory in the late 1990’s.

The point is there are times to buy stocks.  Conversely, there are times to sell stocks.  The time to buy stocks, obviously, is the opposite of the time to sell stocks.  So, too, the time to sell stocks is the opposite of the time to buy stocks.

In hindsight, it’s always so evident when to buy and when to sell.  You can look back at a price chart and it is obvious when prices are low and when prices are high.  Unfortunately, you cannot buy and sell stocks in the past…you must buy in the present and sell in the future.

Nonetheless, you can look to the past for a reference point to where we are at the present.  Then, with a little conjecture, you can make an educated guess about the future.  Hopefully, with a little discipline and foresight, you can make a habit out of buying low and selling high.

The simple fact is stocks go up and they go down…but they don’t go up and down perfectly.  Sometimes after stocks have gone up for a while they roll over and go down.  Other times after stocks have gone up for a while they go up some more.  This is always true except for the times when stocks go down…and then before going up they go down some more.

Present Conditions and Negative Outcomes

The broad stock market movements are what we’re after around here.  Looking back at a recent chart of the S&P 500 we see that after hitting an interim low of 1,278 on June 1, the market has run up over 14 percent.  What’s more it has increased over 21 percent over the last year.  Why?

From our outsiders perch we observe an economy that’s flailing and slogging along.  We don’t see robust growth and a new employment boom.  Just this week we learned that manufacturing activity in the New York region is at its lowest level since April 2009.  Moreover, this week we also learned that FedEx profit’s down 1.1 percent because of the manufacturing slowdown.  No doubt, this won’t help the horrible jobs report from August.

Even so, the stock market and the economy are two distinct things.  For extended periods they can become completely disconnected.  Stock can rise while the economy sags…particularly when monetary gas is on the way.  Thus, based on the market’s recent run up and the economy’s lethargic growth, is now a good time to buy stocks?

It could be…but only if you think giving a Hells Angel biker the middle finger is a good idea.

Quite frankly, right now appears to not be a good time to buy stocks.  Rather, it appears to be a great time to sell stocks.  Here’s why…

According to mutual fund manager John Hussman, “The return/risk profile of the Standard & Poor’s Index has dropped to its lowest point in the last 100 years.

“All of this should make bells go off for anyone familiar with market history.  Of all the investment adages that are being embraced as reasons to accept market risk, somehow the phrase ‘buy low, sell high’ is conspicuously absent.

“In all of the present ebullience about quantitative easing with no ex-ante amount,…the market conditions we observe at present have been consistently associated with negative outcomes throughout history.”

Caveat emptor.  Let the buyer beware.


MN Gordon
for Economic Prism

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