Taking Precautions for When the Music Stops

I have been hanging out quite a bit lately on the Daily Diary here at Real Money Pro. There have been lots of good conversations and some solid trading ideas. However, it feels like a virtual musical chairs support group at times. The overwhelmingly consensus is that the market is significantly overbought right now. A few brave souls such as Doug Kass are shorting some selected stocks. The rest of us are not taking that route, for although we believe equities are overbought, we also realize there continues to be a torrent of money from Congress and liquidity from the Federal Reserve that easily could push stocks and about every other asset higher still. Quite a few regular members are positioning for an uptick in inflation and a weaker dollar by buying hard assets. For some, those assets are gold and silver; for others, like me, it is real estate. Even though my personal portfolio seems to be hitting an all-time high on a daily basis, I was much happier as an investor last spring and summer when there were myriad undervalued opportunities in the market. Now, finding a bargain in equities is like being able to walk a mile in New York City without being panhandled at least once. It is a rare occurrence these days. Even though the market is at all-time highs, the VIX remains higher than its historical average, which tells me we are not the only ones weary of the current trading levels of equities. Insiders certainly don't seem sanguine on stocks based on recent activity, as insider purchases seem to have shrunk to next to nothing. About the only insider buying I am seeing is in new initial public offerings (IPOs) and special purpose acquisition companies (SPACs) and few names insiders have been making consistent and frequent purchases of for years regardless of what is happening in the market. I continue to believe investors are overlooking a lot of risk right now. I also think it is becoming quite apparent that the new POTUS has no intention of governing like he campaigned as a moderate. I base this belief on his first actions as president, which involved myriad executive orders that may have appealed to the grass roots of his party but hardly were welcomed by those in the middle of the ideological scale. Energy looks like it will be the first sector of the economy that will face headwinds from the new administration. We are not even two days into the new regime and the Keystone pipeline has been nixed and fracking has been banned on public lands. In not renouncing those in the party in power calling for supporters of the opposition to be deprogrammed makes me believe calls for unity are as worthless as a three-dollar bill as well. I think in coming days and weeks the new administration will take many other steps that could very well be viewed as unfriendly to business, although tax hikes will probably be kicked down the road to the second half of this year. Will this realization be what finally slows the market's advance? Only The Shadow knows, as my late father liked to quip. In the meantime, I will continue to position my portfolio with an abundance of caution. This means a much higher allocation to cash that normal, acting on the few opportunities I find via covered calls and suppressing my FOMO (fear of missing out) glands even if equities continue to rally. As when the music stops, I plan to be damn sure I have a chair to sit on.

Taking Precautions for When the Music Stops

The market continues to set all-time highs almost daily, but woe to those who are left without a chair should its sweet tune end abruptly.

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