Although it seems hard to fathom, on Thursday the major market averages — the Dow, S&P 500 and NASDAQ Composite — all closed at record highs. The last time that happened was on December 31, 1999.
Yes, we are in a confirmed bull market. The interesting thing, however, is that investors as a whole still remain woefully underinvested. Thatâ??s the opinion of Raymond James strategist Jeffrey Saut, who exclaimed as much in a recent CNBC interview.
Like Saut, Iâ??ve spoken with many subscribers to my newsletter, as well as current and potential clients of my money management firm, and the overwhelming feeling I get here is that investors still largely hold high cash positions.
Yet given the current new highs across the board right now, the logical question is whether it is time to pile into stocks?
I think the answer is no.
In fact, if you arenâ??t already in the market, you need to approach things with extreme caution. There are multiple reasons why, but let me outline a few of the biggest reasons right now.
First, all-time highs are usually followed by at least a modest profit-taking pullback. History makes buying at new highs usually a losing proposition, at least in the short term. I would much rather wait for a pullback off of current levels to start reallocating a lot of capital.
Second, we still have huge headwinds of uncertainty blowing right into the face of this market. Examples include Congressional makeup uncertainty and the biggest uncertainty of all — if Donald Trump is looking increasingly like heâ??s about to win the election. A Trump win may be good for the economy and markets eventually, but short term, it is going to cause a whole lot of financial market anxiety.
Third, we have the headwinds of seasonality, complacency and too-exuberant sentiment. Seasonally, we are still in the middle of the dog days of summer, a traditionally slow, low-volume time of the year for markets. On the complacency front, we have investors that are not really too worried about a correction. Finally, we have market sentiment that seems far too ahead of itself on the bullish side. In such instances, this usually indicates a turn is near.
Now, one way to approach this market if you are woefully underinvested is to employ a technique that my dad, Dick Fabian, taught me years ago. His solution to the problem of buying at all-time highs, and/or after a market has run up substantially, is a strategy called increment purchasing.
The basic idea here is to take whatever new capital you have on the sidelines that you want to invest, and divide that capital into thirds. The first third can go into the market right now.
After youâ??ve put that first third to work, if the market moves up less than 5% during the next 30 days, then you should put the next third of that money to work. Apply this formula to the final third of your money, and in 60 days youâ??ll have put that money to work via increment purchasing.
If, however, the market rises more than 5%, pulls back significantly from your buy point or falls below the 200-day moving average, then you would not put that money to work.
This increment purchasing strategy is perfect for investing when markets are at all-time highsâ?¦ and when the foundation of those highs is threatened by strong headwinds.
If you want to find out how best to buy into the current new highs in the broad domestic market, and in other markets riding the current bullish wave, then I invite you to check out Successful ETF InvestingÂ today.
On the Power of Word
â??He who wants to persuade should put his trust not in the right argument, but in the right word. The power of sound has always been greater than the power of sense.â?ť
— Joseph Conrad
The great novelist made his career by choosing the right words, and here he reminds us of the power of words and sound, especially when it comes to moving a crowd or generating excitement for a cause. Remember this as we enter the final months of the presidential race.
Wisdom about money, investing and life can be found anywhere. If you have a good quote youâ??d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.
In case you missed it, I encourage you to read my column from last week aboutÂ how the latest jobs reports also caused the market to hit new highs. IÂ also invite you to comment about my column in the space provided below my Eagle Daily InvestorÂ commentary.