The short version is that the stock market seems to be continuing along in its uptrend. Despite a few recent bumps and a little volatility the trend is firmly in place. However, and this is becoming a more and more troublesome “however,” there is definitely some signs of worry appearing. You may have heard or read about a selloff in high yield bonds. Or you may have noticed that we sold a large position from your account (BKLN) if you are a client in our Dividend and Growth Strategy. High yield bonds have in the past acted as an early warning signs to trouble in the stock market. A sharp selloff is worth watching.
Specifically in this case, it is my opinion that such a selloff has occurred because there is way too much money in the high yield market that doesn’t really belong there. That is normally “safe” money that would be in bank CD’s or maybe higher quality corporate or even government bonds or mutual funds. But since yields and interest rates are so low, the money has migrated up the risk sladder to grab the 5%+ yields in the high yield market. Money that is stretching for yield is typically skittish – it heads for the exits quickly with a hint of trouble. And that is what we saw at the end of July into early August.
The point of my article is that the same conditions – safe money stretching for return, exists in the stock market. CD money is eschewing sub 1% interest rates for 3%+ dividend yields. Investors have taken out record amount of margin debt (borrowing money using stocks as collateral to buy more stocks). Record high margin levels as we have now were associated with both the Tech Wreck of 2000 and the Financial Crisis collapse in 2007. Although I don’t see a particular reason for a stock market collapse, should a selloff get started it could very easily begin to snow ball, and a “normal” 10% correction could become twice that or more very quickly.
Bottom line. Now is not the time to take on added risk to your portfolios – unless you have a very defined plan to act and act quickly should a market selloff start. We have refocused our portfolios on high quality dividend payers, and have sold our high yield investments. I’m currently targeting a 25% cash position.