Thursday, September 20, 2012

Mea Culpa

I would never claim to be able to forecast precise tops or bottoms in the stock market.  I think instead that investing is largely a matter of probabilities, not certainties.  I also think that there have been reliable indicators that generally favor a higher or lower future trend of stock prices.  Or to put it another way, whether it is likely that stock prices will produce historically high or low intermediate- to long-term subsequent returns.

Short-term timing is another matter.  I consider it futile to try to time short-term moves in stock prices.  Instead, I use a variety of indicators to discern whether the odds are favorable or unfavorable for future returns from current starting prices.

Nearly two months ago, I urged a reduction in equity holdings after many stocks had risen 15-20% in only two months.  Since then, many stocks have risen another 10% or more, and the Standard & Poor's 500 Index has risen about 8%.

While it is quite frustrating to have missed out on this latest move higher, I reiterate my advice to pare equity holdings.  Sentiment measures remain historically high, which does not favor higher stock prices.  Volatility measures are now extraordinarily low, indicating widespread complacency among investors.  Things can change suddenly in financial markets, and about the only asset or instrument that hasn't risen sharply in price is volatility.  I'd raise cash by paring equities or else go long volatility instruments.

Steve Lehman

S & P 500:  1458

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