The Biggest Intraday Drop in Over a Year
The financial media was celebrating the “Return of the Bulls” this morning as the market flirted with a 1% intraday gain. It only took two hours for a total reversal, with the marketing closing a half percent down.
It was the biggest reversal since February 2016. What happened?
The Fed happened.
The Federal Reserve’s meeting minutes were released this afternoon and traders were hit with a bit of infamous nostalgia by some Fed members viewing “equity prices quite high relative to standard valuation measures.”
This hit a nerve with investors - particularly those that remember the dot-com bubble and subsequent crash in the late 90s.
A little over 20 years ago, the Federal Chairman at that time Alan Greenspan made his famous “irrational exuberance” speech that questioned how long the market could hold its unusually high valuations.
The market initially dropped at Greenspan’s 1996 comments, however greed eventually won over and the market recovered for a while, bubbling all the way up to the eventual crash in 2000.
High valuation signals have stared traders in the face for a couple of years now, however many have chose to ignore the elephant in the room, comforted by the fact that the financial media has been giving excuses why the market “should” be at these valuation levels.
But all goes out the window when a higher authority says the market is overvalued. Suddenly people start questioning whether the market is too high, and whether it could actually crash worse than the dot-com bubble.
If you’ve been following my posts, you know that I’ve been consistent in saying the market is overvalued and cannot sustain these valuation levels. Whether we get many small corrections or one large crash – the market will eventually revert to the mean.
How do we handle this situation? Buy dips in strong sectors or capitalization levels, and quickly sell for a small gain. Keep your portfolio hedged with bearish ETFs, inverse ETFs, Put options, or short positions in overvalued companies. Also sell when the opportunity presents itself to make a profit.
Since mid-last year I’ve maintained an average portfolio of 50% bearish positions, 25% bullish, and 25% cash.
Although my percentage allocation remained consistent, I’ve made hundreds of trades and took profits as they presented themselves. And although my bearish-weighted portfolio has contrasted against the extreme bullish market since the election, my portfolio gains have still far surpassed the S&P 500 – all while having ample protection against a crash.
Trust the signals facing us and do not let the financial media or anyone else that tries to “justify” high market valuations influence your trading behavior. Those who can ignore the noise and rationally trade are those that profit in good times and bad.