Making Money Alert: New Highs and the Absence of Fear

The party on Wall Street keeps going, and going and going, kind of like that cute little pink bunny from the Energizer battery commercials. As of midday Wednesday, the Dow Jones Industrial Average was on pace to close at its ninth-consecutive all-time high. That’s quite impressive, and it shows that the bulls still are drinking the champagne and tossing money at stocks.

Now, for the past few weeks, I’ve been telling subscribers to my Successful Investing advisory service that the market’s lofty heights rest on very rocky ground, and that stocks are headed for a bumpy ride at some point in what I suspect will be the near future. So far, I feel like the boy who cried wolf, as the market continues to defy my expectations, as well as sound logic, on its way to multiple new highs.

At this point, it seems as if nothing can stop the upside momentum in stocks. Of course, it is precisely when everyone starts to think this way that the market begins a big slide that knocks the bulls for a loop, and sends the paper gains made in many portfolios back down to historical norms.

As you can see from the chart here of the Dow, it is well above both its 50-day and 200-day moving averages. So much so, in fact, that technically speaking a pullback is long overdue.

When will that happen, and will it be an orderly decline?

Well, if past is prologue, any sell-off from these levels will be fast and furious.

This happened in 1987, when we saw the Dow plunge about 20% in a single day. In 1929, we saw a 25% plummet in one day. In 2008, we saw a 50%-plus plunge in the market over some 14 months. Now, I am not suggesting such a drop is going to happen, but what I want to express here is that while most pundits out there are celebrating the record highs, that is the time when your money is the most vulnerable to getting slammed by a big correction.

This time around, that correction could be induced by all kinds of exogenous events, including a breakdown in European austerity measures; a sharp slowdown in China; the Fed deciding it finally is time to rein in its money printing scheme; and the politicians in Washington failing to do their jobs on the budget and fiscal matters.

I think what concerns me most about the markets right now is the absence of fear, as well as the feeling that the Fed always will have our backs no matter what. Moreover, many advisors I speak with regularly know that this rally is way more driven by the Fed than by fundamentals. But they’ve decided to be buyers nonetheless and take the chance that they can sidestep a disastrous correction. Some investors will be able to, if they’re lucky, but most won’t.

Although the reality of the markets thus far in 2013 has been at odds with my orientation, I remain ensconced in my opinion that a big risk event is on the horizon. To protect yourself from such an event, make sure you have safeguards in place — stop-loss orders and/or a strong sell discipline — to protect your invested funds. If you are not yet allocated to stocks, I say wait for a pullback before getting in. Doing so will offer you a much better low-risk entry point.

Verne on Mistakes and Truth

“Science, my lad, is made up of mistakes, but they are mistakes which it is useful to make, because they lead little by little to the truth.”

–Jules Verne

The novelist and founding father of the science fiction genre knew how to weave an intricate plot, but he also knew how to impart wisdom. Here he tells us about the virtue of making mistakes, because it is through our mishaps that we find truth.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

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