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Commentary: Bulls markets don’t die from a lack of worry

Chuck JaffeChuck Jaffe ·

The thing we’re supposed to be worrying about now is that no one seems to be worried.

Seriously, that’s what Wall Street has come to, a point when the Wall Street Journal is running concurrent headlines saying that short-sellers are giving up, while wary investors have piled nearly $10 billion more into global stock funds in the week ending July 19.

Wall Street has always been a place where good news is often treated like it’s bad, and vice versa. But no one was squawking that the Dow Jones Industrial Average, the Standard & Poor’s 500, the Russell 1000 and Russell 2000 indexes all hit record highs just as that fresh flood of money was peaking.

No one seemed concerned about buying high and selling low at a time when the skeptics are having a tough time finding a catalyst for a long-awaited market meltdown.

And so the worry du jour for long-term investors is that no one is worried.

Traders see this condition as a cautious opportunity, although they acknowledge that it’s tricky to dangerous to play against the current uptrend. Long-term investors are, as the fund flows show, losing their worry about a downturn being anything more than a dip.

The statistics show just how calm the market has become.

According to Terri Spath of Sierra Investment Management, it has been more than 260 days since the last time the Standard & Poor’s 500 went through a correction of 5 percent (which is more like a hiccup than a correction), and the first half of 2017 registered the second-smallest draw-down for the S&P 500 – a decline of 2.8 percent – since 1950.

In a normal year for the market, Spath noted, there’s a drawdown of 14 percent somewhere.

The CBOE Volatility Index or VIX – the so-called “fear gauge” which attempts to measure the expected volatility of the S&P 500 for the next 30 days – has closed under 10 a total of 13 times since May 8. It closed below that level on just 20 days in the preceding 27 years.

But volatility is just volatility; the market has gone through both bull markets and bear markets during times of low volatility and high volatility. It would be wrong to assume that low volatility means bad times are coming.

Investors have plenty of legitimate reasons to be anxious: global politics, tax reform and health care all are concerns. Many experts believe that if the current administration can’t start to show significant progress on its political agenda, the Trump bump could turn into a Trump dump.

The market, to this point, is having none of it; nothing has derailed the bull market.

Investors should be concerned and nervous in all market conditions, but fearing that a lack of worry is the sign of a market top is a waste of energy and emotion.

Worry instead about whether all of this investment prosperity has made you complacent.

The “no-worry worry” will disappear with a few down days on the market. End that string without a 5 percent downturn or suffer that normal 14 percent draw-down and some investors’ heads will explode before they can even make a rational decision about whether this is a bear market or just another buyable dip.

Spath noted in an interview on “Money Life with Chuck Jaffe” that the markets signs are all saying “stay invested” but that investors’ senses should be tingling and reminding them to “stay alert,” revisiting their sell disciplines and setting stop-losses to protect against a downturn.

Complacency in this market for long-term investors is having let your winners run to where your portfolio is out of balance.

If you have been overweight domestic stocks – and are worried about the market here – going back to your planned allocations will smooth out the ride whenever the market turns. It will also expose more of your assets to emerging markets, Europe and other asset classes that in many cases have been better performers year-to-date than domestic stocks.

For all of the success that buy-American investors are enjoying, the home field has not been the most profitable place to invest this year and many observers believe that trend will continue.

Beyond adjusting your portfolio back to target levels, make sure you are still prepared to get through a bad market. To avoid potentially selling low when the market turns, you will want to have enough cash on hand that you can ride out bad market conditions.

For traders, complacency is not looking closely enough at the potential for a reversal or downturn because those moves have been so few and short-lived in recent weeks.

The bullish run will end at some point, but the chief investment officers and market strategists I talk with daily don’t think the end is near. The consensus isn’t always right — the general view for 2017 didn’t include double-digit market gains by mid-year, nor the ability to defy the gravity of bad news – but the easy case for analysts now involves the market’s run continuing for at least another year..

Whenever the run-up ends, it won’t be a lack of worry that kills it. Bull markets don’t die of old age or investor complacency; they end when the numbers stop adding up.

But complacency can kill a portfolio, especially when it reaches a turning point; worry enough now – in good times – so that it doesn’t happen to you.

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   Chuck Jaffe is editor at RagingBull.com; he a nationally syndicated financial columnist and the host  of “MoneyLife with Chuck Jaffe” (moneylifeshow.com). He is a long-term investor and does no short-term trading of stocks, options or ETFs. You can reach him at chuck@ragingbull.com.

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