Are You A Little Too Happy?

Are You A Little Too Happy?

I’m not trying to be a buzz-kill here, but there is such a thing as too much optimism, at least when it comes to investing.

As the saying goes, when everyone is bearish, the stock market likes to climb a wall of worry. Rising because there is ample ammunition on the sidelines to fuel further rises. Conversely, when many are bullish, the market is ripe for a correction because most investors are fully invested.

The “inflection” points are extremely difficult to forecast and are most often only seen after they have happened in hindsight. It’s part of the emotional aspect of investing that is impossible for the large majority of investors to remove from the investment process. I’ll admit, it took me decades in this business to recognize.

I think we are at one of those points. I realize I am going out on a limb here, but everybody just seems so darn happy and content with the market that I can’t see at least a minor pullback.

And with good measure. A sweet combination of a continued accommodating Federal Reserve, the potential end of the trade war with China and an improving global growth outlook for next year 2020 are legitimate reasons to be cheerful. However, we must remember that even trees do not grow to the sky and corrections are not only very normal but necessary to burn off excessive optimism.

What is causing me concern is the combination of Wall Street analysts tripping over themselves to be more positive along with individual investors complacency. I looked at the American Association of Individual Investors’ weekly sentiment survey, and it showed 40.7% of respondents are bullish, the highest levels since May, while only 23.8% are bearish, also near the lowest levels since May.

Of course, illogical market behavior is common. I’ll throw another Keith-ism out here and remind you that the market can be irrational for longer than you can stay solvent. That is more for steady declines, but you get the point.

Now, I am not calling for a calamity here. It may only be 1-3% or it may not happen at all. However, I would prefer something in the range of 3-5%. Keep in mind, that is roughly 800-1400 Dow points, so be prepared.

Once we have it, much of the excessive optimism should be burned off. At that point I believe better that expected earnings we have been seeing are coupled with a seasonally positive period. The market will keep stocks strong, making new highs into year-end and likely the first half of next year.

One more thing. Do not try to trade it, nor should you expect me too. I believe the risk of being out is greater than being in. However, it will be enough to scare you. Remember, If a correction doesn’t frighten you at least a little, it isn’t doing its job.

“Invest for need, not for greed!”™

Cheers –Keith

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Smart Money Newsletter

Written By: Keith Springer

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