Market Pulse: Remain optimistic? Yes!
One of my first columns was “It’s Okay to be Optimistic,” written nine years ago when investors were in a funk and had liquidated stock funds for three years straight.
Since then the S&P 500 has risen 160%, not counting dividends. Yes, it paid to be optimistic then. It will pay to be optimistic now.
For those with a long time frame, being optimistic is a no-brainer. Every market pullback, correction, bear market, etc., has always been followed by a move to new highs. In fact, stocks have never delivered a negative real return over periods lasting 17 years or more.
But not everyone can stomach a long time horizon. I have been on the correct side of the market not because I’m a perma-bull (I raised lots of cash in client accounts in October 2008), for technical and fundamental reasons. I discuss the fundamental reasons almost every week. Remember TINA (There Is No Alternative)? That remains in effect.
As for the technical reason, the single best indicator for predicting major market tops is the Advance-Decline Line. This market-breadth indicator compares the number of advancing common stocks on the NYSE to the number of declining stocks.
Historical studies show the most common characteristic at major market tops was a negative divergence in the Advance-Decline Line. That is, the Dow and S&P 500 reached new highs while the Advance-Decline Line was moving lower for an extended period. An extreme example came amid the internet and technology stock bubble top in 2000, where the A-D Line fell for two years even as the market reached new highs.
So what is this indicator saying now? It still has good news. Very good. Both the widely published Advance-Decline Line and our own stocks-only A-D Line reached all-time highs on Tuesday. A major market top hasn’t even begun to form.
Despite this bullish reading, you might be worried about everyday volatility or a black swan event. For that reason most people should own some exchange-traded debt and preferred stocks in their portfolio. Those securities are stable and yield 5.5 to 7.5%.
I’ve listed my favorites before and I’ll do it again soon.
Bottom line: Don’t get distracted with the alternative investment crowd that likes Bitcoin, marijuana stocks and gold. Those are hard to predict. Instead, own good companies that pay and grow their dividends. Merck (MRK) and Kinder Morgan (KMI) are good examples. Or buy Vanguard Dividend Growth ETF (VIG).
That is a strategy that pays off.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.