This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, September 28, 2009

Bull market set to buck investors

Lately I’ve been watching a little more CNBC than usual, trying to keep my finger on the pulse of this market. In doing so, I’ve noticed a recent trend, one that, sadly, isn’t all too unusual. As guests and commentators discuss market action, prices continue to climb, particularly for stocks and commodities, especially gold.

And yet, predictions and price targets keep moving higher and higher. It occurs to me, after having been raised to be a contrarian investor, that when absolutely no one thinks there’s a top in sight, quite often they’re standing frighteningly close to the edge of a cliff.

My point is this: lately the general public has been getting increasingly excited about where this market might be headed, and all the “dumb money” — those funds not managed by professional investors — has been piling onto the long side of the market

Meanwhile, the smart money has gone in exactly the opposite direction. Wednesday morning we saw the OEX put/call ratio hit the highest levels we can recall. That means that the professionals – fund managers, investment advisors, on down – are all betting that the market is poised for a major correction, one worth hedging against in a big, big way.

So, to recap: Dumb money, which is almost always wrong, depending on time horizon, is decidedly long the stock market, despite its gains year to date. Smart money, which has a much better batting average, is short, and short BIG.

The question for investors is what to do now. After seeing portfolios, on average, cut in half during 2008, most investors have made back at least some of their money, as typically growth funds are up anywhere between 15-30% on the year.

Despite their gains, many investors are happy to sit tight and “let it ride.” There seems to be some sort of sense of entitlement on the part of individual investors that they are still owed the remainder of what they lost. It would appear that a large number of investors have forgotten one of the most important tenets of investing: the market doesn’t care about you.

The sad fact is that the market could care less how much John Q. Public lost in his IRA last year. So if John thinks making it all back is as simple as sitting tight and waiting, he likely has another thing coming.

While most stock funds have made strong gains so far this year, they have done so mostly on blind luck. Recent economic numbers simply do not support current price levels in stocks. So with the S&P 500 P/E ratio currently well over 100, and no truly positive economic news in recent memory, investors need to think long and hard about what to do now.

If you haven’t guessed it, we are currently pushing investors to take their gains and step out of the market for a breather. The coming correction will likely allow investors to buy back into choice sectors at much lower levels, rather than having to ride the market down.

While many investors might protest this argument, the simple fact is that most have taken a beating over the past two years, and need to book their gains and take a little time to regroup. Even rodeo riders get off the bull when their eight seconds are up.

In our view, anyone who sticks around now is just a glutton for pain. They’re more than welcome to ride the market through the storm ahead. But as for us, we’ll be on the sidelines where it’s warm and dry.

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