It is year-end, and time to reflect on this year’s market activity. It certainly has been a strong up trending year for equities. And with all the very positive news currently, there is room for more gains in 2018. However, markets do not just go up forever. The markets are extended without a normal set back of 10% in some time. Is it time to be cautious?
While at the library this weekend, I looked through the Value Line Survey. They had a table of some key market and economic parameters for the present vs. historical highs and lows. Some that caught my attention are listed below:
Parameter Current Last Top Last Low
PE on VL stocks 20.3 19.6 14.3
Dividend Yield VL 1.9 2.0 4.0
Prime Rate 4.5 4.3 3.3
AAA Corp. Bonds 3.5 3.5 5.5
Short Interest/Vol 16.8 17.9 8.6
As you can see most of the parameters are in the range of the last top. On PowerOptions we have a Market Sentiment indicator, which reflects the current values of 13 broad based market indicators. Our recent readings have also seemed to indicate that the market may be over bought. But we have been over bought for some time now, and it is not clear when a correction will take place.
However, with the recent Federal tax cut enacted, there is an incentive for investors that wanted to take profits to wait for the new year to take advantage of the lower tax rates in 2018. Even though the economic environment is strong, there could be some selling pressure on stock prices that are extended. There is an old adage on Wall Street to buy the rumor and sell on the news. Now that the tax cut is a reality and the news is out, a correction could be at hand.
There are several approaches to remedy the stock price risk going into next year
- Lighten up on stocks now before year-end, especially the weaker non-performers or losers. Raise some cash.
- Consider insuring your present positions with put protection as outlined in The Blueprint available at RadioActiveTrading.com
- Enter stop-loss orders or trailing stops on present positions in the event of a market turn.