As prices rally well above "fair market value," it is time to think and invest unemotionally and to consider "margin of safety" with the social, health, economic, profit, political and geopolitical outlook worse than consensus.
Listen and learn from the legendary technical analyst, Merrill Lynch's Bob Farrell, who would likely be more cautionary now.
Rule #4 The public buys the most at the top and the least at the bottom.
Translation: The average individual investor is most bullish at market tops and most bearish at market bottoms. The survey from the American Association of Individual Investors is often cited as a barometer for investor sentiment. In theory, excessively bullish sentiment warns of a market top, while excessively bearish sentiment warns of a market bottom.
Rule #5 Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
Translation: Breadth is important. A rally on narrow breadth indicates limited participation and the chances of failure are above average. The market cannot continue to rally with just a few large-caps (generals) leading the way. Small and mid caps (troops) must also be on board to give the rally credibility. A rally that lifts all boats indicates far-reaching strength and increases the chances of further gains.
- Bob Farrell's 15 Rules of Investing
With the secular growth stocks (Microsoft (MSFT) and FAANG) and the Fed responsible for propping up the markets we seem to be at a 2020 "Nifty Fifty" point in time where price (and valuations) are losing their relevance.
With steadily higher "price(s) changing sentiment" (h/t Divine Ms M), the market's old friend, complacency (a fixture in early 2020), has resurged in prominence. (CNN Fear and Greed is at a neutral "49").
Yesterday, as an example, market breadth was only modestly positive while the Indices surged forward. (see Bob Farrell's two quotes above.)
This morning futures were higher -- by about 15 and 37 handles, respectively for the S&P and Nasdaq (the DSI is now an elevated "93") at 6:20 am.
The S&P Index seems to have a date with 3150 -- this is a level, some 400 handles above my "fair market value" that represents a significantly attractive short level.
In the individual stock world, this week I added to my newly initiated Twitter (TWTR) long position (which is now large) - it's the value seekers' Amazon (AMZN) and Facebook (FB) with nothing priced in for deal optionality.
Bottom LineWith stocks elevated and fundamentals unsound, it is time, again, to consider return of capital over return on capital.
From my perch (and apparently Bullard's) the backdrop remains most uncertain.
I plan to dispassionately move from medium-sized to large-sized on a further market advance towards 3150.
That is probably what Bob Farrell would be recommending.
(This commentary originally appeared on Real Money Pro on July 2. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)