The prevailing sentiment among U.S. stock market investors suggests a looming crash, likely preceded by a dramatic surge that will culminate in an explosive peak. In order to benefit from this eventual peak, investors must ride their stock holdings until the precise moment the market reaches its zenith, and then promptly sell before it declines.
This strategy sounds appealing in theory, but the pressing question remains: how can one accurately identify the moment the stock market peaks?
Is the telltale sign of a market top when your shoeshine boy gives you a hot stock tip? Or perhaps when your neighbor shares his strategy for enhancing returns by shorting the Volatility Index (VIX)? Maybe it’s when your gym buddy boasts about purchasing luxury items using a “portfolio line of credit”?
From our viewpoint, these scenarios—including the presence of excessively high valuations—could be considered strong indicators of a market peak. Yet, we acknowledge our past misjudgments; we believed we had seen the top four years ago, only to watch the market continue its ascent. Had we acted on our instincts, we would have missed out on considerable gains.
So, how do we interpret this situation?
Meaningless or Meaningful
Approximately five years ago, a particularly challenging client described our relevance in the grand scheme of things as akin to “a gnat on an elephant’s rear.” This insightful comment followed shortly after we were accused of undermining his venture. Naturally, we accepted his unique praise with a smile.
On a recent Tuesday, the Dow Jones Industrial Average (DJIA) plunged by 362 points, translating to a decline of 1.37 percent. This represented one of the largest single-day drops since President Trump took office, instilling a momentary sense of panic throughout Wall Street.
Yet, in the overarching context, a 1.37 percent drop is trivial—truly insignificant. It amounts to virtually nothing.
But how did you respond? Did panic set in? Did you feel anxious? Did you decide to sell off some of your holdings? Or did you dismiss it as inconsequential?
While a 1.37 percent loss appears minor, it could also signify the onset of something substantial. Are we beyond the market peak? Has the anticipated blow-off top already happened? Will the DJIA’s record close of 26,616, set on January 26th, become the highest point of this bull market?
These are valid inquiries, but do we have definitive answers? As of Thursday’s market close, the DJIA had yet to reach its January peak. What if it remains below that record for the next 20 or 30 years?
Even though the DJIA hit over 70 record closes in 2017, such a future seems hard to believe. History reminds us that it took nearly 15 years for the NASDAQ to set a new all-time high following its peak in early-2000. Similarly, the Japanese Nikkei, which approached 39,000 in early 1989, has only recently begun to recover towards 23,000, nearly three decades later amid widespread currency debasement.
Currently, there’s no method to determine if the DJIA has truly peaked. It could rise and set new records tomorrow, or it might not.
What’s evident, however, is that the common strategy of holding onto stocks through the peak and selling at the market’s zenith relies on the flawed assumption that one can predict the ideal time to sell. What should you do next? Should you buy the dip? Or sell during a downturn?
The right answer varies by individual. We can agree there are worse moves than taking profits by selling some of your stock holdings at this late stage in the nine-year bull market. Securing those profits could provide capital to reinvest when the anticipated bear market lowers valuations to more attractive levels.
But what other avenues are available? Again, the answer will differ for each person. Nonetheless, with a touch of creativity, a multitude of opportunities becomes apparent.
How to Buy Low When Everyone Else is Buying High
Conventional wisdom dictates that a reliable method for building investment capital is to buy low and sell high. Conversely, consistently buying high and selling low is a surefire way to lose money.
Purchasing an S&P 500 index fund at this moment would equate to buying high. Thus, it may not be the smartest decision. Instead, consider seeking investments that represent a better opportunity to buy low.
For instance, legendary investor Jim Rogers recently suggested that now is the time to invest in the “troubled” agriculture sector. His reasoning is straightforward—demand for food is rising while the number of farmers is declining:
“No one wants to be a farmer anymore, unlike in the past when farmers were revered,” he explained. “The agricultural sector has faced 35 years of decline. The average age of an American farmer is 58, and in Japan, it’s 68. Notably, the agricultural sector holds the highest suicide rate in the UK.”
“This imbalance between future demand and supply in agricultural commodities is bound to drive prices higher.”
Rogers makes a compelling case. However, like most people, we do not aspire to be farmers. Thankfully, we can still capitalize on the potential agricultural boom from the comfort of our own homes.
This can be achieved by investing in the PowerShares DB Agriculture exchange-traded fund (ETF) (NYSE Arca: DBA), which encompasses a range of commodities including corn, wheat, soybeans, and sugar futures. This ETF currently trades around $19 per share, while it previously exceeded $41 a decade ago.
For investors prepared to exercise patience and allow the agricultural cycle to unfold, this represents a practical alternative to blindly investing in the S&P 500 index, as most others are doing. In essence, this approach enables you to buy low rather than high.
If you find this opportunity intriguing and are eager to explore similar options, consider subscribing to the Wealth Prism Letter. The February edition will be released this coming Monday morning and will feature a unique investment strategy aimed at wealth accumulation. Learn more about the Wealth Prism Letter and how to subscribe here: Wealth Prism Letter.
Sincerely,
MN Gordon
for Economic Prism
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