Friday, July 13, 2007

Markets at All Time Highs - Should you be worried?

The markets seem a little bubbly these days, hitting all-time highs in several indexes. Most of the experts suddently seem to have become bullish, despite their agreement that the market has been climbing the proverbial "Wall of Worry" recently.

So, should you be worried or euphoric? I've traded thoughts with a few friends recently and the insights might be worth sharing.

First of all, keep in mind that the new highs are over those of about 6 years ago, when euphoria was high but earnings were much lower. Thus, while the market is certainly not cheap today, it does not seem wildly overpriced either. Assuming some of the worries dissipate, it would seem the market has room to run.

On the other hand the bull run is over 4 years old, so the market is a bit nervous. Any sign of new worries or worsening of those now being mentioned are causing traders to keep a finger on the sell button.

As I've said to my friends, I'm neither optimistic nor pessimistic on the market. It does seem a bit bubbly now, but it could well go higher over time. The most likely result is increased volatility. That is great news for me, since my system depends on volatility to outperform the markets (see previous articles for an explanation if you are not a regular reader).

In accord with all this, my system had me buying a few weeks ago but is flashing a sell right now. Of course, this is the short term response to the volatility. In the longer term picture, my system has me holding a significant cash position, meaning I'll be ready to capitalize on any volatility, whether it be short term or a significant bear market. That's the beauty of the don't need to know what the market will do to ourperform the market. Check it out in posts on "Taking Advantage of Volatility" or "Dollar Cost Averaging on Steroids".

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