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Weekend Reading: Errant Thinking

Submitted by Lance Roberts via RealInvestmentAdvice.com,

Last week, I penned a post entitled “You Can’t Time The Market?” which was subsequently picked up on the Seeking Alpha website. It is always interesting for me to read the comments on the articles as it gives me a lot of insight as to the psychology of individuals currently investing in the markets. Specifically, it also tells me much about individuals who have never been through a “reversion” in the markets.

The article was addressing an individual’s ability to capture the upside in the market while missing a bulk of the downside by employing even a simple moving average strategy. To wit:

“While there are many sophisticated methods of handling risk within a portfolio, even using a basic method of price analysis, such as a moving average crossover, can be a valuable tool over the long term holding periods. Will such a method ALWAYS be right? Absolutely not. However, will such a method keep you from losing large amounts of capital? Absolutely.”

“By using some measures, fundamental or technical, to reduce portfolio risk by taking profits as prices/valuations rise, or vice versa, the long-term results of avoiding periods of severe capital loss will outweigh missed short term gains. Small adjustments can have a significant impact over the long run.”

Of course, this is where, despite seeing the chart posted above, this comment was left.

“Completely disagree since the market can trade at or near a record top for months or years. Yes, much of the time. Check a monthly chart of SPX. “

Okay, we can do that. As shown, while markets during the FIRST HALF of the market cycle can certainly elevate to extremely overvalued levels as exuberance displaces underlying fundamentals, the SECOND HALF takes generally wipes out all of the gains from previous break-even levels.

[image]https://realinvestmentadvice.com/wp-content/uploads/2017/02/SP500-Time-To-Recovery-022317.png[/image]

Unfortunately, given the fact that investors don’t live forever, unless they have contracted vampirism along the way, the issue of time horizons are a major problem of the recovery process.

It is this errant thinking that continually leads investors to believe that somehow this time is different.

While exuberance in the markets currently reigns as prices continue to reflect economic and fundamental perfection, this time is likely no different than the last. The only difference will be that those with experience will leave the markets with the money from those whom will ultimately gain the experience.

In the meantime, here is what I am reading this weekend.

Fed/Economy

  • Culture Shock by Danielle DiMartino-Booth via Money Strong
  • Trump Putting Off One Of His Biggest Promises Till 2018 by Bob Bryan via BI
  • Trump Is In The Wrong Place At The Wrong Time by Frank Chaparro via BI
  • Regulations Are Stifling Business by Stephen Moore via The Washington Times
  • Trump Needs To Build On Market Gains by Jonathon Trugman via NY Post
  • Trump Is Wrong, Banks ARE Lending by Gretchen Morgenson via NYT
  • The Inherent Asymmetry In The Fed’s Policy by Caroline Baum via MarketWatch
  • The Great Disruptor Strikes Again by David Stockman via Daily Reckoning
  • Job Creation Has Nothing To Do With Trump by Isabel Sawhill via Real Clear Markets
  • GDP: Can Trump Deliver 4% by Anu Bararia via The Fiscal Times
  • Why Do Republicans Think They Can Deliver GDP Growth? by Paul Krugman via NYT
  • 1986 – The Last Tax Overhaul by Albert Hunt via Bloomberg
  • The Contradiction At The Heart Of Trump’s Policies by Ana Swanson via WonkBlog

Markets

  • Warning Signs Are Piling Up by Frank Chaparro via BI
  • Bull Market For Junk Bonds by James Picerno via Capital Spectator
  • The Rally In Stocks Is Doomed by Wolf Richter via Wolf Street
  • The Case For Dow 30,000 Has Strengthened by Nigam Arora via MarketWatch
  • This Contradiction Has Everyone At Odds by Sam Ro via Yahoo Finance
  • Market Timing Out Of Favor? Might Be A Sign. by Mark Hulbert via MarketWatch
  • Stocks: High Risk Of Disappointment by Buttonwood via The Economist
  • Oil Going To $70 Or $30 by Nick Cunningham via OilPrice.com
  • Yellen To WallStreet: Slow It Down by Mark DeCambre via MarketWatch
  • This Bull Market May Soon Hit Resistance by Michael Kahn via Barron’s
  • Is The Trump Stock Bubble Ready To Bust? by Bress Levin via Vanity Fair
  • Only Blind Faith Could Have Me Long This Market by Doug Kass via Real Clear Markets
  • Dow 21,000 Masks Stocks Being Left Behind by Anthony Mirhaydari via Fiscal Times
  • Why Investors Shouldn’t Just “Buy Everything” by Joseph Adinolfi via MarketWatch
  • Too Far Too Fast? by Paul La Monica via CNN Money

Research / Interesting Reads

  • Chicago Fed: Economy Has Been Stalling by Jeff Seymour via HVST.com
  • The Flip Side Of Interest Rates by Matthew Klein via FT Alphaville
  • Millennials Becoming More Socialist by Joel Kotkin via The Daily Beast
  • How The Fed Is Gaslighting You by Mike aka Gubbmintcheese
  • Lies, Damn Lies & Taxes by Marc Chandler via Real Clear Markets
  • You Should Be Afraid Of FaceBook by Leonid Bershidsky via Bloomberg
  • Debunking Myths Of IRA’s by Maurie Backman via USA Today
  • Cash-Out Refinancing Signs Of Trouble by Keith Jurow via Advisor Perspectives
  • The Fed’s Credibility Problem by Jeffrey Snider via Alhambra Partners
  • Recession Concerns Grow As Gas Slides By Most In 16 Years by Tyler Durden via ZeroHedge
  • Financial Engineering Has Masked Economic Health by Satyajit Das via MarketWatch
  • When Speculator Prosper Through Ignorance by John Hussman via Hussman Funds
  • Stocks Boast Record Run Of Buoyant Behavior by Dana Lyons via Tumblr
  • What’s A Prudent Investor To Do? by Jesse Felder via The Felder Report

“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality is distorted by a misconception.” – George Soros