Conditioned Reflexes and an Overbought Stock Market

Okay, Mr. Market, we know your plans.  You have spent the last two years, and really the last 14 years, "training" us.  And like the trained monkeys that we are, you have convinced our brains to look at the last two years, and when you whistle, we come drooling ready to be fed.  Not peanuts, but either rags or riches based on your training.  So, this is what we've been experiencing for the last two years.

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The market rallies, we get excited, and you open the trap door, right?  Oh yes, we know your plot.  We're not falling for that again.  As you can see in the chart below, we see the stock market overbought - just like it was in 2010, and just like it was last year.  So no, we might have been buying at those points, but you are NOT going to trap us again.

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Yeah, right!!  Mr. Market is a master animal trainer, but this trainer is not trying to show us off to the cheering crowd as we do our flips and flops on cue.  This animal trainer has one thing in mind - making us look like fools again and again and again.  So as we get conditioned, he is going to reverse the course of action.  He knows we are massive victims of our emotions.

That is the gist of why investors get taken to the cleaners time after time after time.  So today, the monkeys are sitting in cash and know for certain that the economy is not going to rally and that the stock market is never going to experience a bull market again.  Our Asset Allocation Model has not changed too much since last Tuesday, as Psychology remains at P4, despite it weakening slightly over the past week.

So today, in the daily management of portfolios, we think it is justified to be a little more prudent on your purchases, and if you have stocks that have not lived up to their potential, it is a good time (if they have rallied up to technical resistance levels) to do a little pruning.  However, the 12-month potential for this bull market is still excellent, and Mr. Market is still a lot smarter, and is devious and mean and wants to lead you (and us) astray.  Don't ever forget that!!

Don Hays

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