by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Wednesday, March 20, 2013: Issue #1993
In case you haven’t noticed, the market has been on a tear. Since mid-November, the S&P 500 is up 16%. It has gone practically straight up since February 26. It’s gone up 10 of the last 13 trading sessions.
So it’s no surprise that bears and skeptics are looking for reasons for the market to turn south.
And last week they got a good one. Actress Mila Kunis told CNBC she’s started investing in stocks.
That got wannabe contrarians in a lather, calling a market top. It must be, they suggest, when a 29-year-old who is better known for playing opposite Ashton Kutcher in That 70′s Show rather than for her financial acumen starts spouting off about the stock market.
I’m guessing, however, that most of those calling a top didn’t watch the interview. Kunis was asked what she does with her money. She mentioned she’s very conservative and likes to keep it in the bank, but is being “pushed” to invest in stocks. So it sounds like she’s getting some good guidance from her financial adviser.
There is no reason why someone with decades before retirement should be in all cash. It’s not like Kunis is pretending to be a financial expert, because she’s made a few good trades.
Which brings us to Rachel Fox. The 16-year-old actress has been making the rounds on financial television, advocating the benefits of day trading. The Desperate Housewives star is apparently a successful day trader and blogs about her thoughts on the market and individual stocks.
Fox doesn’t use fundamental or technical analysis, she just claims to have a feel for stocks and can tell when they’re overbought or oversold.
That got the contrarians going. When a 16-year-old actress trades stocks based on feel and then goes on TV to talk about it, the bull market must surely be near its end.
Or when a wrong-way Corrigan ex-Fed chairman, Allan Greenspan, says stocks are not overvalued, surely they must be. Right?
Just because a beautiful woman who doesn’t know much about the markets, a kid who thinks she does, or an octogenarian with a lousy track record, say that stocks are a good investment, doesn’t mean they aren’t.
Not There Yet…
For sentiment to be at extremes, we need everyone talking about stocks, not just a few people who make us snicker. Remember during the dot-com boom when taxi drivers were giving stock tips? When doctors and lawyers were day trading from their offices, or even giving up their practices entirely?
Or how about during the housing boom when instead of trading eBay (Nasdaq: EBAY), those same doctors and lawyers were flipping houses? When everyone was seemingly investing in real estate because “it’s the only way to make money.” That’s when sentiment is at an extreme.
We’re not there yet.
And valuation is certainly not at an extreme level.
The S&P 500 is currently trading at 15.3 times earnings. Over the past six years, the average has been 15.4. Since 1871, the average has been 15.5. So stocks are hardly overvalued.
But let’s give the naysayers the benefit of the doubt for a moment. Let’s call this the Kunis top. (I prefer the image of a Kunis top rather than a Greenspan top.)
The market has always come back to hit new highs after a bear market. If you’re invested for the long term, you should have nothing to worry about. For those of you with a short time horizon, go ahead and sell your stocks to Mila Kunis. Maybe it is the top. Or maybe we have another 100% to go before this bull has run its course. I don’t try to time the market, so I’m not too worried about it.
Rather, what I do is invest in great companies that pay rising dividends.
Those stocks tend to outperform no matter what the broad market is doing. And if the market goes against me, I get paid 4% to 6% to wait it out – reinvesting those dividends at lower prices if we do in fact experience a bear market.
So let people mock Kunis, Fox and Greenspan. Maybe those who are looking at this trio as a contrarian indicator will get lucky and will time this thing right – although few people ever do. You should just stick to your plan and not worry about what others are saying about the market – or even worse, what others are saying about what others are saying about the market. Even if those others are A-list Hollywood starlets.
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