Stock Market Trend Intact—But Correction Risk Rising

It’s always wonderful when the stock market is going up. The vast majority of equity investors are making money. But I always look at the stock market in terms of risk, not potential return. When you have a market that’s been going virtually straight up for the last six months, I view investment risk for new positions as very high. Investment returns on new positions only happen if the momentum lasts and, if history is any teacher, it usually doesn’t.

Really, the stock market’s been going up with considerable fervor ever since the low set in 2009. A lot of the gain was just about recovery from the financial crisis, but the stock market’s move has been very pronounced and investors would have done great just trading the index and not even worrying about picking individual stocks.

Last summer, investor sentiment was terrible and this was reflected in share prices. The S&P 500 Index hit the 1,200 level, retreated to 1,000, and then bounced around 1,100 for a while, before accelerating once again. I think that the broader stock market is due for a similar kind of consolidation (or correction, if that’s a better term) and this would be a healthy development. This year, however, I see the S&P 500 Index hitting 1,500, which would basically complete the right shoulder formation on the chart that looks so ominous.

Like I say, I view a rising stock market as rising investment risk for new positions. The higher the stock market ticks, the more reticent I become about picking new stocks in which to speculate. I suppose this is due to my affinity for the buy-low-and-try-to-sell-high investment philosophy. I also don’t like to trade very much. I’d rather wait for extremes to develop, then just go the other way. This takes a lot of time and patience and it’s a strategy that a lot of people aren’t interested in.

I’d love to see a major pullback in precious metal prices. This would represent an attractive new entry point. But similar to stocks, I don’t see any major correction of more than 20%. Global fundamentals support current price levels in equities and commodities and I think most analysts would agree that the stock market isn’t expensively priced at this time.

So, with the current state of things, there is no need for investors to do much of anything new. The broader market’s done great over the last six months and is due for a correction. Now isn’t the time to be loading up on stocks. It’s a time for continued patience.