The CEO of TD Ameritrade is warning that cash levels at the brokerage house are at historically low levels. He notes that customers are buying at all-time high levels, buying on margins and buying leveraged ETFs. Everyone is trying to strike it rich before the party is over. Trying to advise investors to sell is nearly impossible.
Investors are afraid to miss out on the potential to make money. Just before the most recent pullback, a survey by Investors Intelligence showed that the level of bullishness had reached historic levels. Other surveys show what appears to be a misguided view that the current market will never go down for long.
Investors still believe that if a pullback or a major correction in the market occurs, they would be able to get out of the market before any real damage is done to their portfolios. What most investors either don’t understand or are simply ignoring, is that people always sell in a panic and timing the markets is a fools errand.
This does not necessarily mean that the market will crash. But it is a very strong signal that even while the S&P reaches record highs, some major volatility has made its way back to the market. Keeping volatility low is no easy task. Volatility can be suppressed for so long before reality sets in and things get back to normal levels.
For many, this is déjà vu all over again. Market dynamics are clearly shifting – just like in 2007 right before the 2008-09 market correction.
Jeffrey Bierman a technical analyst with TheoTrade recently said that “bull markets don’t die because of old age but they die because of statistical probabilities and measurements.” Mr. Bierman adds that the current market risk measurements are screaming, “take the money and run.” He reminds us that, “risk cuts both ways.”
Investors should be prepared for the possibility of the markets returning to their means. If the Dow retreated to its 200-day moving average of 22,600, a drop of 10-15%, most investors would be caught completely by surprise.
It has never been more important to be prepared for such an occurrence. Every investor must learn how to protect their portfolios and limit their exposure to risk and have a strategy in place. Precious metals are the most efficient way to hedge against the inevitable correction to the markets. The last thing any investor wants is to be unprepared for a major correction in the markets.