Feeling Good Baby, Feeling Good

Investors are pouring their money into equities right now. What does this mean for you, as an investor, and for the market?“Global investors flooding into equities… After the financial crisis made stocks a scary alternative, the fear has subsided and the trickling flow of cash has turned into a torrent,” reads the headline in Thursday’s The Globe and Mail (Toronto, 2/17/11).

The article goes on to quote a Merrill Lynch monthly survey of nearly 200 global money managers that says the “world’s leading investment professionals” are more in equities today than any other time in the 10 years the survey has been conducted.

There are two very important points here for my readers:

First, you don’t bet against the trend. With money pouring into equities and a large number of advisors expecting a stock market correction, stock prices will likely continue their immediate-term advance.

Second, all this money flowing into stocks is actually negative for the market. The same people that bailed out of stocks in March 2009 are now marching back in. What does that tell you? Really, what does history tell us about investors when they work in herd mentality? History has told us that the stock market usually goes against the herd mentality.

The “Feeling Good Baby, Feeling Good” mentality of today will eventually become the “Get out of stocks” mentality of tomorrow. And that feeling could sneak up quickly. My readers should follow the market higher right now and enjoy their profits. Don’t bet against the trend; join it.

But at the first sign of trouble, my readers should also be ready to jump ship and get out of stocks. Too many bulls, rising interest rates, bonds falling in price, a U.S. dollar about to test a record low against other world currencies—these events do not happen at the beginning of a bull market; they happen before the bear comes out of hibernation.

Michael’s Personal Notes:

Guess things are not that rosy for the economy after all…

According to the U.S. Labor Department, applications for jobless benefits rose by 25,000 to 410,000 last week. If the economy is indeed getting better, these statistics should be going the other way.

Also from the Labor Department, U.S. consumer prices rose 0.4% in January, exceeding analyst expectations. The core consumer prices rate (excludes food and fuel) rose the most since October 2009. Inflation rising? Anyone other than me smell higher interest rates ahead?

Where the Market Stands; Where it’s Headed:

Did anyone see that bullet train? The market is rising so quickly, I can’t keep up. Another winning day for stocks yesterday—add it to the list. The Dow Jones Industrial Average opens this morning up 6.4% for 2011.

Immediate term, I love stocks. Short to long term, I’m a bear.

What He Said:

“Any way you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that unfortunately came true.