Managing Editor’s Note: If you’re following Larry’s paid research, you know he’s predicted this year will be treacherous.
As he put it in his prediction essay at the start of this year, “Investors [are piling] into stocks. And you don’t want to bet blindly against that momentum. But with stocks trading at excessive valuations and overbought, there’s a lot of room to the downside.”
Larry’s not alone in looking askance at the recent market action either…
That’s why, today, we’d like to share another special guest essay from fellow editor and longtime trader Jeff Clark.
Like Larry, Jeff thinks the market is looking risky…
We’re only five weeks into 2024, and the S&P 500 is already up 4%. The index traded as high as 4,975 on Friday – which is within spitting distance of the 5,000 price target many analysts pegged for the end of the year.
At this point, it’s hard (mathematically) to argue for even more upside from here. And technically, it’s starting to feel a little like early 2022.
Back then, after the S&P 500 popped 7% higher in just four trading days, I argued folks might be well-advised to cash out and take the rest of the year off.
A 7% gain is about the historical average annual return for the stock market. And by February 3, 2022, traders had already achieved that return. So, why not lock in the gain and take a well-deserved 11-month vacation from the stock market?
I can make the same argument today.
Lock in Some Gains
With the S&P 500 already up 4% for the new year, the index is trading 22 times its 2024 earnings estimates. That’s at the high end of its historical valuation range. And that puts the earnings yield (earnings divided by price) at 4.94%.
By comparison, a three-month Treasury bill yields 5.25%.
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Investors who caught the rally over the past five weeks can sell and lock in a 4% gain. Then, they can stick the money in a money market fund for the next 11 months and collect another 4% or so.
That’ll give them an 8% return for 2024 – which is on par with the historical average of the stock market, without any risk of a market decline.
And that risk looks substantial right now. Here’s an updated look at the chart of the S&P 500…
As the S&P 500 has been making new highs over the past month, all of the momentum indicators at the bottom of the chart (MACD, RSI, and CCI) are making lower highs. This sort of “negative divergence” tells us the momentum behind the rally is waning. It is an early warning sign of a reversal.
So, with the fundamental valuation stretched to the high of its historic range and the technical condition looking poised to make a turn, investors might follow the same advice I offered in early 2022…
Consider taking the rest of the year off.
Best regards & good trading,
Jeff Clark
Editor, Market Minute