I’m Worried About Stocks

By Michael Melissinos

The speculative culture we’re currently living in has me a little worried for a lot of investors. The Schiller P/E ratio and Buffett Indicator are at/near all-time highs. Stock market optimism is through the roof. Berkshire’s cash balance as a percentage of total assets has hit new highs. The yield curve just un-inverted after two years. Inflation is ticking back up.

I think people have taken stock market performance for granted. People “know” stocks always go up. That’s what the recent past has confirmed to them. Stocks up has become a fact of life. And hey if things get hairy, they also “know” that the bailout gods will come to save them. So just keep buying, fellas.

I preach trend-only and currently hold plenty of long positions (both in individual names and indices), so take my worries with a grain of salt, but I think there are some ominous signs out there. I’m not selling any of these positions because I’m worried. That’s silly. The trend is up and that’s all that really matters.

But I also know that uptrends don’t last forever. Things can still get a lot crazier to the upside, but that doesn’t mean you throw caution into the wind. You can participate in the craziness while implementing risk control.

I believe pride and greed are overtaking fear. Measuring this is extremely difficult and often futile, but my gut says we’re either entering or have already entered a frenzied stage.

This is what makes trend-following so useful, especially when you’re feeling confused or worried. You don’t get caught up in the emotional flux and forget about what to do. You lean on the foundation of all decision-making — the trend.

Focusing on the trend and riding it to the end keeps you from cutting successful trades too soon. Many investors have done this over the years. They sell the second they worry. That doesn’t work well because often our feelings do not align with the trend.

So, yes I’m worried about stocks. I know the uptrend won’t last forever. They never do. The trend remains up, so being the hardcore trend-follower I am, I’m staying long for now — but I’m prepared for the reversals.

It’s better to give some profits back at the end than being on the sidelines when the top occurs. Think about it.

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