Frankly, I wonder whether any amount of arm-waving will incline investors to actually examine their risk exposures here, much less consider the prospect of a 40%+ decline in the S&P 500 Index that would be required simply to bring stocks to historically run-of-the-mill valuations. But at a time when our estimates of prospective risk are surging, I would be remiss not to observe that fact.
At present, we have what might best be characterized as a broken speculative peak, in that market internals (particularly interest-sensitive groups), breadth and leadership have broken down uniformly following an extreme overvalued, overbought, overbullish syndrome. If you recall, the market also recovered to new highs in October 2007, weeks after the initial, decisive break in market internals at that time. Presently, we’re looking at the same set of circumstances. On some event related to tapering or the Fed Chair nomination, we may even see another push higher. It isn’t simply short-term risk, but deep cyclical risk that is of concern.
My main goal here is to encourage investors to look carefully at their investment positions, before they lose the chance to alter them advantageously. As I noted in the October 15, 2007 market comment Warning – Examine All Risk Exposures:
“Whatever market exposure investors accept today ought to be the same market exposure that investors are committed to maintain for the duration of a bear market, without abandoning their investment plan. Investors with no plan to own stocks through a market decline, holding them only in the hope of selling at market highs, may discover in hindsight that these were them.”