The markets are not pricing in reality.
Consumers are scared to death these days. We can see that in retail spending.
Homeownership rates are at 20-year lows. Unemployment isn’t healthy. The labor participation rate is at multi-year lows.
The savings rate is moving higher, as consumers hoard cash.
Even some of the biggest names on Wall Street are worried.
Former PIMOC boss, Mohamed El-Erian, just moved to a big cash position.
“That’s not great, given that it gets eaten up by inflation. But I think most asset prices have been pushed by central banks to very elevated levels,” he says. “There is a massive gap right now between asset prices and fundamentals.”
The news sent shockwaves through the investing community.
When a guy this smart admits that, it’s tough to disagree. There’s a valuation concern, he says. Returns on investments could very well be negative in the near-term.
To him, cash could outperform stocks and bonds as it did in previous disasters. I’m sure you remember the dot-com and subprime disasters fondly.
Could it mean the next disaster is near?
It’s possible.
Stock funds have seen outflows of up to $44 billion, according to Bank of America Merrill Lynch. Equity funds have seen outflows of $6.1 billion over the last two weeks. Investors are concerned, as they should be. The markets have been pushed to extremes.
Granted, not all of us can afford to move into cash if it means giving up current income streams. So we can do the next best thing by protecting our money, and positioning well.
One of our favorite ways to protect for downside is with trailing stop loss orders. Another is to reduce risk per trade. Instead of risking 20% to 30% per trade, halve it.
Know all risks associated with any stocks or bonds bought.
Have ideal entry and exit points for all trades. Never leverage. Know when to cut your losses and move on. It’s essential that you prepare for the worst-case scenario, as a just in case.
We’re cautious moving forward at the moment, as the Dow re-challenges overhead resistance.
Forgotten Profits
Over the last few months we’ve closed some great winners. In recent weeks, we’ve taken some hits in a directionless market.
But we continue to hold all open positions… and we’re looking to add a new position today.
American Express (AXP) – for example – is just beginning to bounce off double bottom support near 52-week lows. This is a big name that’s simply down on rough times. It’s not likely to last for much longer. I believe we have an opportunity to steal this at such levels.
Consider buying to open the AXP July 2015 80 call up to $3.
Ian L. Cooper
Forgotten Profits