Everything is expensive. What do I buy?

The equity market is moving in very narrow range these days and we have not seen 5%+ in either direction for a while. It is a result of rich market valuation and monetary policies. I am going to put on my "two-hand" economist hat here. 

On one hand the pricing is very rich/expensive for both equities and bonds - ie PE multiples are very high and yield/interest rates are very low globally. 

On the other hand Fed/ECB/BoJ have in place low interest rate policy and QE programs which effectively set a put / bottom for the market. Market cynics call them central bank PPT - plunge protection team. 

Together the market participants formed this Buy the Fxxx-ing Dip (BTFD) mentality and the correction is getting smaller in magnitude (<5%) and shorter in duration (1-2 weeks). If you blink your eyes and want to wait for clearer signal, you miss the entry. If you get greedy, a 2-3 day correction can wipe out small gains accumulated over 2-3 weeks period.

It is not a good environment for long-only buy-and hold (or more accurately buy-and-hope) investors. A 10% correction and 20% bear market will eventually come but you never know when. You only know it in retrospect. If you totally stay out of the market, you might miss the next 5-10% as market grinds up to all time high after all time highs. This is the case for 2014 and it might happen again this year. Making market calls in this type of environment is a loser's name, as the profitability is going to be very small, 1-2% range, and most people might miss the quick exit. 

Diversification bewteen stock and government bond does NOT work well, as the market fixates on monetary policies, and bond and stocks move in similar directions. In general, when concerns originate from interest rate/bond market, bond and stocks tend to move in same direction. When they come from equity market or from political/geopolitical/credit market, the two move in the opposite fashion.

All in all, the current environment is NOT good for traditional type of buy and hold, after a 8-9 year bull market in both stocks and bonds. If you are frequent trader, you can fade frequent yet small movements and try to harvest market volatility. It is also conductive to long theta short gamma type of option trading that sells risk in a controlled manner. 

If you are not into day trading, you can just scale in and scale out. Budge a certain percentage of you money to buy as market goes down, and sell them as the maret recovers. Do this around a core holding. Money sitting in cash does NOT earn anything. 

As always, YMYC.

Just my 2c



 

 

 

[3bunny]

这篇写得真好，really appreciate your work on helping others to understand this market.