Overbought and Overvalued

Readers will recall that for almost a year, we have forecasted that the market will continue to have an artificial rally due largely in part to the low interest rate and Quantitative Easing policies of the Federal Reserve, which will ultimately result in a market correction. Meanwhile, we simultaneously forecasted that the economy would reach a plateau. Recent reports have validated those claims.

From an economic standpoint, the United States economy does not have much to brag about currently. While existing home sales are doing rather well, year-over-year GDP is still in the low single digits, Consumer Confidence has yet to rebound to pre-2009 levels and unemployment is still a concern amongst business owners, despite declining Jobless Claims figures. As we predicted, many businesses have delayed hiring and opportunities for growth due to uncertainty related to the costs of employees as a result of the Affordable Care Act.

From an investment standpoint, we have been trying to think of a time that we could compare today’s equities environment to. So far, we have come up with early 1970’s when the US was combating inflation and stagflation, the late 1980’s when the market turned south due to the Savings and Loan Crisis, and the Dot-Com bubble of the early 2000’s. There is literally not a shred of economic data that we can find to substantiate the current levels of the Dow Jones Industrial Average today.

Looking at a brief history, we can see that the Dow saw a post-2008 low of 6547 according to StockCharts.com. During 2013, a time when the Dow saw 50 new record highs, the index’s all time high was reached at almost 16,500. In less than 5 years, the Dow increased 152%.

Recently, the Dow has experienced a bit of a wild ride, having many investors begin to panic. Headlines have been asking if this is the “Big Selloff?” All of this hype and panic has been over a measly 4% decline. Now sure, some investors who are not susceptible to volatility will say that a 4% decline is quite significant, but 4% down in one month following a 152% bull run is really not a very significant amount.

Our read is that many “non-Main Street” investors, such as your hedge fund managers and global investment groups, have begun to realize that the party is over, that they made their money in 2013, rode the market up to it’s all time high, and are now jumping ship.

This is certainly not advice one way or another regarding the Dow, but simply a cautionary tale; when you think an investment is at its peak, it certainly can always go higher. However, if that peaked investment begins trending down, it may be difficult to find buyers and get out before it is too late.

The number one tenet of investing is to buy low and sell high. There is not a single money manager in the world who can tell us that the Dow is undervalued right now based off of its historical values. Coupled with poor economic data, it could very well be the precursor to a market correction.

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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