I am revisiting the question “is it too late to enter the market?”, as there are so many investors constantly asking this question. They look at the juicy profits achieved over the last few months and ask is there room for more. I believe the short answer is yes but that does not mean you go out and splurge tomorrow.

If you are a short term trader then there have been wonderful plays and this is likely to continue to be the case as when markets appear to become toppy then volatility increases and this is an ideal environment for short term trades.

Most of the people I personally have contact with are not day traders but rather want to either establish or add to a sound long term portfolio that hopefully will have limited volatility.

What has surprised me more than anything has been the short-lived retracements, thus there have been few glaring buy opportunities. The reason there have been so few retracements has been because there are few sellers of quality stocks and with the prospect that the markets might climb higher this is likely to remain the case.

What will push the markets higher? Apart from the large quantum of cash that is looking for a home with equities being the preferred asset class, the economic indicators continue to confirm a global recovery from the malaise of the past decade. As the world takes so many of its leads from the USA we cannot avoid looking at the factors that are driving growth. Retails sales are setting new highs despite some caution in consumer sentiment; corporate profit reporting has quickly returned and expectations are that there will be few surprises to the downside. The rationale behind this confidence is that most businesses have had costs stripped to the bare bones and so increased sales with growing consumer confidence will go straight to the bottom line.

The strong growth signs we are seeing in the USA have without doubt been boosted by the compelling growth in China and confidence is now flowing through to other global economies and most importantly the European economies.

So how far can or might the USA market go before a major correction? Look at the montly chart below for the Dow Jones and you will see there have been three major rallies over the last decade or so.

click chart for more detail

These are:

  1. early 1995 to mid 1997 - approximately 30 months
  2. Mid 1998 to mid 1999 - approximately 12 months
  3. early 2003 - approximately 7 months to date

The only point I make here is that we have had some quite long rallies before and the market (that is people) are maybe a little smarter this time around, learning from past experiences that after long rallies the pain of a severe and protracted correction follows. Investors will be more sensitive to the smallest of signs of a correction and will literally run for cover.

There are analysts still calling for a major serious correction but these experts are less vocal right now. What is their rationale for a correction? There are a number of risk factors such as:

Increasing consumer debt
Currency volatility/imbalance
Consumer confidence damaged by a property bubble detonation
Stretched equity valuations
Faltering Global growth
Rising Interest rates

Lastly there is the Scollon “X” factor – which can be the geo-political-human unknown phenomena that is maybe only the catalyst for correcting a market that has overextended.

A useful question to ask yourself at the moment is, will the stock you are about to buy give you a 10% gain? Then the next most important question is: is there a reasonable possibility the stock might fall 10% before you get that 10%? It is salutary to recall that investors who bought the market in June 2001 and February/March 2002 are still behind today – they are still losing money!

I have covered much of the above over previous articles but the points are worth repeating as in heady times it is not inhuman to feel a little invincible. The markets are such that when more and more pundits feel this way that is when the markets whip us. Opportunities abound but “buyer beware”.

Enjoy the ride.

Tom Scollon