Monday, March 18, 2013

We’re Buying Stocks Like It’s 2007


A headline in my Saturday paper said the Dow Jones just wrapped up its best streak in almost 17 years.  The recent 10 straight days of gains was the longest “winning streak” since 1997.  But remember the stock market is not a basketball team.  Basketball teams achieve winning streaks by playing well, the stock market has winning streaks because the fans decide that it’s time to keep cheering.  

Yes, this market is smoking hot!  Articles are speculating about just how high the market could go.  Other articles are encouraging investors to get back in the market big time.  Hot actresses with absolutely no knowledge of the market are talking about buying stocks in interviews.

But there have also been several articles comparing the exuberance about the stock market now to the excitement in the summer of 2007.  The market was also sizzling then.  Everybody was talking about and buying stocks.  There was speculation about how high the market could go. There was extreme investor confidence.  There was absolutely no way this market could fail.

When I instructed my broker in October 2007 to pull my money out of the market, he thought I was crazy.  This was the most contentious conversation that I have had with him in nearly 30 years of the relationship. That’s how hot the market was in October 2007, about two weeks before the crash started.

The stock market can break your heart!
The stock market is as stable as a high school romance.  It can catch fire and burn hot quickly without warning.  He/she loves me and this is going to last forever, that’s until it suddenly collapses leaving you devastated with a broken heart.

Is it Possible 2012 GDP Was Overstated?

The economy grew 2.2% in 2012, or did it?  ECRI (Economic Cycle Research Institute) says its recession forecast in 2012 is correct because when the 2012 GDP numbers are revised, it will show that we were really in recession for part of the year.

Is this possible?  I believe that the economy was so “jumbled” by the Great Recession that many of the usually reliable economic indicators are still giving off false readings.  This includes both the ECRI index and the GDP numbers.  However, if you look at some economic statistics; imports, exports, miles driven, freight, employment, it looks like growth was between 0-1% for the year. 

The two sectors that were strong in 2012 were housing and natural gas.  Housing was growing because its recovery did not start until Q1, 2012.  Natural gas production growth is due to technological innovation (fracking), not an economic cycle recovery.  Even if the economy grew at 2%, if you subtract out housing and natural gas, then the rest of the economy was very tepid.  That’s why many commentators say it still feels like a recession.  You also have to trust that the government accurately estimated GDP with no upward bias in an election year.  I have vowed not be political this year, so you must decide this one on your own.

Economic Growth Has Started (Again)

The economic reports for February have been very positive.  After a few months of 0% growth, the economy is looking much better.  My “expert” panel has raised the Q1, GDP forecast to 2.2%.  However growth will remain “choppy” with the forecast at only 1.6% for Q2.  The recent positive economic news has helped fuel the rise of the stock market and the hope of even higher gains.  However, the stock market has not been in sync with the economy for several months and a 1.6% growth in Q2 is not a positive sign.

Model T Update

The market exceeded the Model T forecast (as was pointed out by several alert readers) of 1550 on March 8.  I have been asked if the Model T needed to be recalculated.  Historically the model varies by +/- 2%, so the upper limit is 1583.  In addition, the timing of the model is more important than the S&P number.  The number is useful in determining if the model is functioning properly.  The model still forecasts a peak in May, however the fact that we are over 1550 (the peak so far in this cycle is 1563) means the peak could come in April.  I am planning to move a significant part of my money out of the market in early May.  Stay tuned.


  1. I am selling stocks where I have a profit or that I think will drop most in a correction. I am moving money out of some stock mutual funds to short-term bond funds. I plan to move about 35% of my money out of stocks. Never move all your money out. That is too risky if the market would continue to increase. Please send me an e-mail and I will put you on the e-mail list.