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New Highs… Now What?

40 | By Shah Gilani

The bulls are running today, being chased by hot mergers and acquisitions news.

As I write this, the S&P 500 is at an all-time high and the Nasdaq Composite is at a 14-year high. The Dow still has a few steps to climb, but there’s a good chance it too will reach for new highs in the next few sessions.

According to Matthew Keator, the namesake at Keator Group, a wealth management firm in Lenox, Mass., “People are recognizing that while some economic data has been muted, there is still a lot of value in the market based on corporate cash positions and multiples. From a perspective of overall fundamentals, things look pretty good, especially relative to other asset classes.”

He’s right about investors recognizing value in the market, and that corporations are sitting on fat cash positions.

It’s the big hoards of cash that’s pushing mergers and acquisitions. And there’s value in the U.S. market. But that’s all relative.

As Keator points out, things look good relative to other asset classes. And he might have added that values look good here because the U.S. is the cleanest dirty shirt in the laundry.

Elsewhere around the globe, things aren’t so rosy.

The U.K. just saw a bump up in their unemployment rate, the emerging markets are struggling, China is grasping for laundry detergent to clean up its shadow banking mess, and gold — which has been rising furiously — is indicating that not everything is hunky-dory.

So if you’re heavily invested in U.S. stocks, you’re in good shape.

But there’s a lot to worry about.

Economic data has been mixed, which is putting it nicely. What’s nice right now is that investors are looking past a host of soft numbers in the U.S. and figuring the Fed will roll over its “put” positions that traders and investors have come to rely on as a floor for the market.

After all, it is their articulated policy to create a “wealth effect” by keeping rates low to pump up equity markets. For that, they deserve a gold star.

But — and it’s a big but — what’s underneath the Fed’s stimulus efforts remains to be seen. If the Fed continues to taper, as they say they will, and if rates rise (by that I mean if the 10-year gets back above 3%), will emerging markets freak out? Will the flight out of emerging markets accelerate? Will their attempts to stabilize their currencies by raising rates (some by huge amounts) slow their growth to the point that they actually falter?

Make no mistake, the U.S. is the place to be for investors. That is if you’re all in and have been all in, and have a plan to take profits here and there, and see the taper for what it really is, the beginning of the end of easy gains for the markets.

I see that. I’m taking profits and raising my stops. I’m starting to buy some puts. I’m finding shorting opportunities that on a risk reward basis are positively ripe.

There are asset classes that are vulnerable here.

Where is “here?” Here is making new highs in the U.S. as the rest of the world looks to be slowing down. Yep, I said it, slowing down.

I’m not the only one saying it. Christine Lagarde, who heads up the IMF, just came out with a warning that they are seeing a dangerous propensity towards disinflation in Europe and elsewhere. What the IMF is worried about isn’t disinflation. They’re worried about deflation.

The macro of all macro worries (besides a credit crisis in China that creates a “Lehman moment”) is that the more than $14 trillion in global stimulus since the last credit crisis hasn’t created enough “escape velocity” for global economies (we’re all in this together now) to grow on their own without Mama’s milk.

Bad weather in the U.S. will distort GDP numbers and almost all economic data measures we all watch to see which way is up, or if there even is an “up.” That means we’ll have to wait until the end of the first quarter and probably well into Q2 before we get any clarity on growth momentum.

Meantime, the market isn’t waiting. The new highs are a sign of optimism that the weather is just the weather and that when we thaw out, spring will arrive with all its green shoots and the economy will flower.

I can only hope that spring will see us “spring” ahead.

But I don’t hope when it comes to trading and investing. I take well-calculated, measured risk and reward positions. And right here, I’m starting to put on positions that will scream higher for me if the weather isn’t just a blinking yellow light, if global growth slips, if China has a Lehman moment, if the Fed continues to taper, if the rally is a head-fake.

Sure, I’ve got on my core positions and they’re rising with the bulls. But I’m also selling calls on them here. I’ve had a nice run and now want to garner more income. And if those calls mean my positions get called away, so what? I make more money. I can always get back in. And in this market, I’d do that by selling puts.

All this was to be expected as record amounts of money came out of equity mutual funds the week ending February 5, 2014. Any move higher was bound to see a lot of that money come back in… and it has!

That’s what I’m doing right now. But I want to know what you’re doing.

Your view and your feelings are representative of investors in general. You are the market when it comes to “retail” investors, when it comes to the “public.”

What are you seeing out there? What are you feeling?

Shah

40 Responses to New Highs… Now What?

  1. John B. says:

    Current portfolio primarily upstream MLP’s (heavy on natural gas as opposed to oil) with blue chip oil and gas internationals and service companies with a low cost gold miner for downside and a small domestic rare earth miner for “homeland security” position. Way too much cash on sidelines waiting for good news to get out of market here but stops are good idea. Rates will remain low through this year at least with Fed printing more money to please Wall Street. To me this means no matter where the market SHOULD go it will remain in and around where it is waiting to go higher on good news and only down on “real” bad news.

  2. Jan Kiefer says:

    If the stock market, in general, takes a downward turn and a recession seems possible, WHAT SECTORS OF THE MARKET ARE SAFE? If Ft. Knox really doesn’t contain much gold and if the Bond market drops, gold, silver and energy are probably safe – what else? Is there a “safe” Index Fund? I’m 77 and just getting into the stock market. I value your opinion and follow your recommendations as much as possible.

  3. James Sturgeon says:

    Dear Shah,
    I can’t help feeling the bull market is on “borrowed time”. Everyone is trying to squeeze a last few dollars out of this artificial rise in price (without underlying value) with their hand all the while hovering over the “panic button”. It’s almost to the point where what I thought of as “contrarian” in expecting a correction is more like being aligned with mainstream opinion now!
    The result will either be a “zombie market” going nowhere but good for a few option plays or a flat out crash. Either way I’m glad to have diversified somewhat into physical gold just to posess something with a prayer of maintaining its value.
    By the way, I really enjoy reading your posts!

  4. H. Craig Bradley says:

    OOPS, there goes another one (banker). In recent months, three J.P. Morgan Chase bankers have jumped. So many unusual financial events are being “papered-over” or completely overlooked. Everyone it seems, (except bankers) are so Jolly. Time to do some snooping around, Shah.

    nydailynews.com/news/world/jpmorgan-employee-jumps-death-hong-kong-article-1.1618679

    What is really going on in the global financial system? Is international banking a high stress job? Is the loss of your finance job in today’s economy a death sentence? Reminds me of the old John Gresham film in the 1990’s titled: ” The Firm”. They recruited and wined-dined promising law school graduates. However, once hired they were trapped for life. ( It was a criminal enterprise). We live in an age of “financial engineering”. What then, is ‘reality’ ? Something dark is going on.

  5. R.Koch says:

    Gann’s 60 yr cycle projects a big uptrend in gold and silver along with ag grains so I am long the above. By contrast, a decades-long bonds top has been recently made causing me to short these debt instruments. Rates will rise!

  6. Bob Mehlhorn says:

    I am aware this has been a long running bull market and many experts say a correction is overdue and I have watched the market and my only stock, WFC closely, Thanks Warren ! I thought the correction was due several months ago and I feel it will come soon, especially when you mentioned the emerging markets however there is always the nagging but ……………….

  7. ASHLEY GOODMAN says:

    I CANNOT BELIEVE THAT NO ONE IS TALKING ABOUT THE CALIFORNIA DROUGHT DISASTER. CALIFORNIES AGRICULTURAL ECONOMY IS IMPLODING. IT HAS SUPPLIED ONE THIRD OF THE FRUITS AND VEGETABLES CONSUMED IN THE U.S.A.. NO MORE THERE IS NO WATER ALLOTMENT FOR FARMERS. THE NUT FARMERS ARE TEARING OUT THE ALMOND TREES. IT IS TOO COSTLY TO CARE FOR THEM. SAME IS TRUE FOR THE DAIRY FARMERS, BEEF FARMS ETC. ETC. THE VEGETABLE FARMING BUSINESS IS KAPUT. THE REST OF THE SOUTH WEST ALSO HAS A SERIOUS DROUGHT. THIS WILL EXACERBATE THE ECONOMIES OF 11 STATES WITH DISASTEROUS CONSEQUENCES, WITHOUT A DOUBT AND THE REST OF AMERICA AS WELL. WHAT HAPPENS IF THOUSANDS OF BUSINESSES ARE SHUTTERED AND FOLKS HAVE TO ABANDON THEIR HOMES, THEIR COMMUNITIES THEIR JOBS AND SEEK WATER AND JOBS ELSEWHERE MANY TOWNS ARE RUNNING OUT OF DRINKIING WATER AND UNLESS IT RAINS 10 INCHES A DAY FOR THE NEXT 200 DAYS THE DROUGHT WILL NOT ABATE. WHY ARE YOU NOT DISCUSSING THIS AND COMING UP WITH SOME ADVISORIES. SOUTH FLORIDA ALSO HAS A WATER PROBLEM WITH SALT WATER INTRUSION INTO ITS WELLS AS WELL AS THE INABILITY TO DRAIN OFF ITS GROUND WATER BECAUSE OF RISING OCEAN LEVELS. WE ARE TALKING ABOUT THE LIVES AND MISFORTUNES OF MANY MILLIONS OF US CITIZENS.

  8. H. Craig Bradley says:

    CASH IS NOT TRASH (in Today’s Uncertain Environment)

    James B. Stack, of Stack Financial Management in Whitefish, Montana tells his clients: ” Cash is not a four letter word” He is leery of bonds in this (rising) rate environment and prefers defensive sectors at this point in the 5 year bull market. Others prefer cyclicals. Lots of investors, such as myself, are distrustful of stock markets that have been unduly influenced by the FED and other central banks around the world (Japan). We may be in a transition if the FED follows-though. We will soon see if we have a sharp and deep correction if the FED will blink first or ‘Taper’-on.

    Somewhere, somehow ( in spite of the weather), the domestic economy must eventually demonstrate sustained growth (other than debt) or the market won’t keep its new highs for very long. As my cousin told me last summer: “cash is not trash”. Cash helps keep your portfolio’s beta down. Its really good insurance and does not cost you any premiums either, just low interest (gains).

  9. peter says:

    Hi Shah, i trade mostly options and just today i tightend up my stops. My largest stock holding is in the vxx thanks to u.

  10. Lauri Partanen says:

    During 2013 I had big loses in gold stocks, however I think things are quite different now,and gold stocks are going to have a fantastic year.There seems to be a lot of funny things going on in the gold sector and sooner than latter the trueth will come out.With China buying as much gold as they can get their hands on, and Germany not being able to get 375 tons of their own gold back as fast as they wanted, and how much of that paper gold in the banks is really available if everyone wanted to cash in for real gold.Plus,plus plus. Meanwhile Shah Im very interested in what you said about making big returns in 24 hour periods.

  11. Ken says:

    Shah, I’ve read your comments for several years. I tried to write an email about your new program, but I received an annoying response I had to go to the web site to ask. I wanted to know if you had actual audited trade history, or even back tested info – instead of marketing hype.

    What is my take? Asset prices are what asset prices are. I nor anyone I know can accurately forecast prices or the economy. I have economic models I created for my PhD, and I still use. They indicate to me that we continue to fight deflation. Generally, deflation indicates the liquidation of debt, and the center all banks have tried to stave off deflation 1. By creating long term debt through QE 2. By funky accounting rules special for banks only (I suppose to show the value of their assets are high in order to stop a run on the banks. )

    Governments throughout history have tried to inflate debt away. Why do economists every time think they have created a new economy where rules don’t apply?

    Anyway, Shah thank you for the many years of insite you brought through your news letter.

  12. Ronald E. Wilson says:

    I have never known anyone who got rich trying to trade stocks. You can not consistently make the right calls. Lets go back 86 years to include the Great Depression. 89 times the market has dropped 10% or more. 21 times it has dropped 20% or more. 9 times it has dropped 30% or more. Guess what, if you would stayed invested all those years you would still have made 9+ percent. Show me someone who can get you those kind of results. That’s a return of more than 200 $ for every 1 $ invested. Teach your kids to put 10% of their paycheck in the S&P index from their first check till their last check. By retirement time they will be all smiles. Wish I could have been so smart. Forget the ups and downs. It’s good to buy stocks on sale. Tell me you don’t go to the mall more when they have a big sale. Forget the ups and downs and sleep better at night. What a comfortable plan. Thanks for your incite. Your words are well worth reading. They are the most interesting I have seen for a while. Again thanks.

  13. Myles Butner says:

    I’m puzzled that Commodities (particularly metals) continue to be depressed. Do you see a breakout building on Ag Au and Cu? What will presage a rise?

  14. Tim Marakovits says:

    Fully invested. Wanted to sell covered calls on Boeing when it was over 140 but missed it. Wanted to buy some positions when the market was down in early Feb, but missed it. There’s a pattern here.
    If we keep heading higher I’ll try again to sell the BA calls, but I’m not sure whether to buy on the next dip because i’m wondering if it will be deeper than the mild correction earlier this month.

  15. Gary Duggleby says:

    We are in the industrial electronics market. Its up a little with a few of our larger customers, but not overall. The people that I talk to are always a bit edgy anymore because of the tech bubble and the housing bubble and how hot the economy was just prior to the bubbles bursting. So even though we all want the economy to do better, most of us want an economy that is built on sold footings, not foam.

    But there is a bright spot on the Horizon. Its from the efforts of many self taught inventors/programmers/artists and designers that are part of a new movement, primarily embraced by younger people. There are “maker” groups, Meetups groups of entrepreneurs who are designers and programmers, and many new funding vehicles such as kickstarter.

    What I see is the resurgence of the alternative high development energy that created companies like Apple and Microsoft. What makes visionary people like this different than the average engineer or programmer, is that these people “jump out” of the slower paced engineering and development cycle, and go on an alternative path of development, because they feel that they do not have the time to wait.

    I like that.

    We are working with some of these start ups and I am as excited as I was in the late 1970’s and early 1980’s.

  16. Dusty says:

    You asked. I see the same things you see except I am not financially competent to deal with them. Therefore I am trying to keep my hands and what little money I have in my pockets. The FED seems to have a tiger by the tail with QE. Whatever it does to benefit the US hurts emerging markets. For a time it can and will help the US but the effects elsewhere are undermining everything. That sets up all kinds of possibilities for both global disaster and unexpected ways of escape. For now, I just feel a lot like a mouse that is about to become totally involved with the tires of a speeding Greyhound bus.

  17. Doris says:

    All I know is agriculture, the nations largest industry. 2/3 of the country is in drought. Retail meat is $1 higher than a year ago and would be higher but the far west is down sizing their herds do to the drought. That is bringing more meat onto the market than would normally be available after the droughts of 2011 and 2012 that devastated the mid-western herds. Vegetable prices will soar this summer unless California gets lots of rain soon. Bee losses will take their toll on the food supply too. Expect Almond prices to double or triple. The BLM (Bureau of land management) has given up on rounding up any more feral horses as they are going broke caring for the ones they currently have in holding (61% of their budget). Holding until they die of old age (about 20 years on average). They are just going to shoot the ones left on the range when they get to weak from starvation/dehydration to run (if they find them). In short, things don’t look to rosy.

  18. Pierre says:

    As a relative newbie to investing, my $90,00 up here in Canada will likely be cashing out of all positions that are currently up 20% or more. I will re focus that money on option straddles which are likely to catch the drippings from any sudden market thaws.

  19. Louise says:

    What I’m seeing is a lot of warnings from various financial writers. They offer dates for banking collapse (everything from April 1 to July 1st). They advise the purchase of precious metals, the closure of savings accounts, acquisition of long-term food supplies, BUT at the same time they sneak in names of stocks scheduled to balloon in value while the rest of the market comes crashing down. They write interminable warnings and sneak in photos of WWII manpower offices (you can tell by the style of clothing worn in the photos). Altogether, I’m losing faith in many predictions. Well, you asked what I think. That’s the answer.

  20. Bob says:

    Hi Shah, this rally is as false and artificial as some of my teeth. And yet bad news is interpreted as good news because of a continuation of the Bernanke put. And anyone trying to short these markets is being taken out and shot by the Fed Reserve. Truly an insane world!

  21. Steve Coggins says:

    I am concerned. The Dow, S&P and Nasdaq are at all time highs. Large Corporate profits seem to be predicated on ‘buybacks’. Billions of cheap borrowings remain on balance sheets with no intention of being used for capital investment. Official Unemployment is a deception based on manipulated figures. (unofficially unemployment would be north of 20%) USD is in process of being substituted by a basket of currencies (this will be a Big one !) If US Interest rates head North then US will struggle to pay the Interest on it’s borrowings. Grave questions lie over the PIIGS and BRICS. Civil wars in the M.E. +++ Many triggers ! I am justly concerned about the West; the Markets (including Housing) are about to take the ‘front-line’ brunt of all this destabilisation.

  22. Andrew Wielawski says:

    What goes up, must come down. My feeling is that a climb this straight, with only a tiny pullback in the last few weeks, isn’t comforting. I am selling and taking profits, and reinvesting only a part of my profits in huge, long term, stable stocks like Monsanto..

  23. Jacqueline vanOutryve says:

    Trying to copy you….selling covered calls. Made a mistake in selling Put on
    DNB just before earnings, had to buy to close, as I did not want to buy the stock, big mistake on my part. Have a lot to learn. .. but think I can do this.
    Thank you.

  24. raymond says:

    I like following your advice and many others that seem to be good investments………Do you have an investment company that I could sign up with ?………I seem to have faith in your advice along with your friends also………..I have had other brokers but they have never amounted to much………….I would appreciate a reply

    Thankyou

  25. ton c says:

    What are you putting on? What mutual funds are worth looking at? Those are the vital and most important questions. All else is mere talk.

  26. Mark says:

    I’m 57, work at a non-union grocery store.(no pension) I just moved all my 401K into cash. I can’t afford to lose that. I still contribute and buy stock funds with new money, I get a company match. One bird in hand is worth 2 in the bush.
    In my personal trading account I start with 10-20% trailing stops then as or if the stocks go up I tighten the stops. most of my current stops are at 5%. When I am stopped out I look at it as a new opportunity to screw up, but I’ve either been learning something or just very lucky. Never caught the big one, yet.
    I try to keep my small account balanced. I don’t really buy enough stocks (100 shares) of the same thing? Maybe in the future it may happen, for now the idea is too big and not usable to me. It’s like an old Steve Martin skit on Saturday Night Live on how to make a million dollars.

  27. kevin says:

    Feeling squeezed between Hope and Fear
    The markets are a turbulent place because of Tapering’s next step.
    Forward or backwards depending on employment, which is never as Hoped for. Fearing the double dip because the economy has not reached “escape” velocity in the expected time to return to natural growth of 3% plus, to keep us up with inflation of costs. Then the dreaded cloud of “National Debt” is not dissipating and looks like it will rain on our Parade sooner rather than later.

  28. Edward H. Rudberg says:

    Dear Shah,

    I am a trader mostly but do have some ETF holds. I have no college credits in finance. I’ve learned just about everything in trading stocks, the hard way. First, I learned that my brokers could easily lose me money and they did. I looked up to them, not thinking that I could run my own show but after large losses, I just had to get in the game for myself…to protect myself.

    I am mostly an instinctual trader at this point. I try to keep things simple. I follow some newsletters and have, through experience, a sort of “feel” for what to do. I also look to experienced professionals (including you) for guidance and stock picks, along with my own stock picks.

    I am only about 6 months into trading options and my account is still positive. I only have a cash account and trade mostly calls. I am unable to trade your technical option trades but am looking forward to those trades that are strictly calls and puts.

    I am concerned like you about the market and hope that it doesn’t become a house of falling cards. This bull market has extended itself to a point where many bull markets end (timewise) though, for a bear market to then take over.

    Your call to the downside, in your new service, is kind of gutsy but then kind of appropriate. It seems like a good call but that it might be a tad early? But isn’t that how we lose money, by that settled-in comfortable feeling and then cablooey, down it goes. It’s as if to say that I cotcha again napping, thank you, or gotcha, gotcha, gotcha.

    I have been selling a little bit, trying to cut my greedy side and taking some of those juicy gains that I’ve made.

    I have high money goals and am starting to cushion those profits by taking them. It’s so easy to lose it all, if we don’t use the Boy Scout motto which is, “be prepared.”

    I like your humor regarding playing the downside and how we are entitled to profit from it…even though it goes against our inclinations. I’m with you there, though I want our country to succeed and myself to succeed, too. Because
    I’m older, I have to take advantage of every opportunity to fulfill my dream of
    becoming a millionaire but tempered with good judgment, hopefully.

    Thank you for looking to us for insights and setting aside ego, to find out what we amateurs are thinking and doing.

    Sincerely,
    Ed

  29. john says:

    Shah,

    As a senior I have no wish to invest in Puts.

    As a subscriber,I have followed you and made some nice gains. I like the old advice “What to buy and When to sell” Not all have been winners, however, I am not complaining.

    Change is not always for the best.

    John

  30. Chris says:

    Unless your timing and selection was impeccable, anyone who has gone short in this market has been a loser. So you stay with the trend until you see a failure of the trendline, and you make maybe 15% on your investment. Or you attempt to jump in and out and try to pick tops and bottoms and shoot to make 20 or 25% on your money. How does that saying go about bulls, bears and pigs?

  31. Bill bush says:

    Shah, I see this market continuing to top thru Spring and perhaps, irrationally, thru early summer, providing there are no unanticipated major international financial crisis. However, I am staying nimble ready to go short if the market heads south sooner. I want to take full advantage of the current uptick which is approaching the top of an intermediate term chart channel.

    I am glad to know that your professional opinion is in line with my amateur analysis. I tend to use the use the IBD system except for core holdings.

  32. James says:

    Shah,
    I have just retired and am becoming aware that my retirement income (company pension) is entirely based on the market going up. Can you suggest an simple way (possibly ETF) that provides “long lasting” insurance to balance my risk? I have bought some short funds but with re-balancing over time they go to near zero (FAZ, HSD). SPY might also not hold up over time as losses mount in the “long term” with expiry after expiry.

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