This isn't just any old stock market rally. It's the first leg of a global generational bull market.
Stocks around the world can and eventually will double and triple from here.
Investors want to know if it's too late to get into the record-breaking bull market.
They want to know if they should take profits... or keep their chips on the table.
They want to know how to navigate any correction, if one comes.
The answers to those questions are easy. You just have to understand where we are.
My record picking major market tops and bottoms is exceptional.
That's important, because the global generational bull market isn't going to be a straight run.
There will be ups and downs.
And to get the most of both, you need to know this market and have a plan...
First, you have to understand that the first leg up was made possible by the Great Recession.
Stocks and almost every major asset class were sold off in a flight to quality and cash as the U.S.-led financial crisis spread far and wide. The deleveraging and discounting of equities and commodities created a safe entry point, especially for stocks.
The Federal Reserve and central banks around the world had to step in to stem the deflationary tide that swept across the globe. All of their resulting stimulus essentially created a floor for stocks. U.S. equities in particular benefited by the Fed's extraordinary stimulus.
Low interest rates allowed corporations to refinance their balance sheets, raise cash for buying back their shares, and strengthen their longer-term prospects. As a result earnings have been robust and buyers have been snapping up shares since 2009.
Globally, shares have risen handsomely, but not without some hiccups.
Outside the U.S. other developed markets rose, sometimes in fits and starts. And emerging markets enjoyed good upswings too.
Because emerging markets are prone to capital flight as foreign investment that boosts domestic growth industries (mostly export businesses) can exit quickly, emerging market investors tend to be more nervous.
Of the developed world, the U.S. has been called the "cleanest dirty shirt in the laundry" on account of other developed economies' reliance more on exports than internal consumption. Those other developed economies are also considered less dynamic than America's economic landscape.
It's been an extended "first leg" up for stocks, especially U.S. equities, which haven't experienced any meaningful correction in a long time.
I've been dubbed the "reluctant bull" by Varney & Co.'s Stuart Varney and his co-host, Charles Payne.
Why? Because we haven't had a meaningful correction. I'm riding this bull market higher, because you have to, but I'm nervous.
Stocks here in the U.S. could have further to go on this long first leg up. Some of the positive signs are that labor markets are showing improvement, with headline unemployment below 7%. Third-quarter GDP growth came in at 4.1%. Inflation is barely 1%. We have a tentative budget deal, and the Fed has tapered only marginally while saying they intend to keep rates low into the foreseeable future.
The economy isn't too hot or too cold, which means the Fed isn't backing off its backstopping anytime soon. That's a goldilocks scenario for U.S. equities. Low interest rates will continue to support corporate balance sheets and the Fed will keep serving up its porridge.
My reluctance stems from some of the same positive attributes equities have enjoyed. The positive trend in headline unemployment belies the disturbing number of workers falling off work rolls because they can't find jobs and have given up looking.
The GDP's 4.1% showing is the biggest rise in a long time and unlikely to continue. Any serious backing up of the upward GDP trend in the fourth quarter will set up a much closer look at first-quarter GDP. If that isn't substantially better than 2.5% - and it should be, given the market's dramatic rise - markets could get jittery.
Inflation, at least headline inflation, looks tame. But consumers are seeing higher prices everywhere, especially for groceries, and those rises come in the face of depressed commodity prices. That could change. If we see solid above-trend growth globally into 2014's first two quarters, it will change, and commodity prices will rise quickly.
And about that budget deal... The fight over the future of deficit spending and the country's borrowing ceiling is far from over.
That leaves the Fed as the only reliable gift giver to the equity markets. If the Fed continues to expand its balance sheet, at some point markets could lose faith in the Fed's long-term solvency.
If that happens, the long awaited correction will turn to a rout.
As the bull market's long first leg up continues higher, it's time to start planning for the coming correction. which we will eventually get and which may come in early to mid-2014. And it's time to start mapping out how and when to load up for the second leg higher.
If you own shares now and have enjoyed the tremendous upward trajectory, don't be greedy: Nothing goes up forever.
Keep raising your stop-loss orders to lock in rising profits. If you get stopped out because you rang the cash register, don't rush to get back into the same stocks, at least not yet.
If you've been sitting on the sidelines, start buying. But for sidelined buyers, it's too dangerous to chase high-flying momentum stocks now. There will be plenty of time for that after markets take a break. Instead buy solid names that offer reasonable dividend yields. I'm talking about stocks like General Electric Company (NYSE: GE), Apple Inc. (Nasdaq: AAPL), and Microsoft Corporation (Nasdaq: MSFT), along with huge energy companies and a smattering of rich dividend-paying REITS.
If these stocks, which should be your core holdings (because they are huge companies, have tons of cash, are buying back their shares, pay dividends, and aren't going anywhere), fall in price, you should be adding or averaging down when lower prices make their dividend yields better and lower your cost basis.
The reason I'm recommending buying now is that the market could go higher before it takes a breather, but if it falls and you're adding to new core positions you're back in where you should be. You have to be in it to win it.
There's no guarantee we'll see a correction in early to mid-2014, but most of the metrics I follow, some of which are proprietary indicators I've created that have served me exceptionally well, are in fact pointing to possible market stress in 2014's first two quarters.
Trading the markets and investing for the long term necessitates having a plan at the ready if a selloff happens. No one knows how deep or how long any correction will be. But everyone knows buying when share prices essentially go on sale is a winning strategy.
Because we're heading a lot higher in the years ahead (because deleveraging will eventually run its course, especially if central banks get out of the way and stop manipulating rates and markets), loading up on any significant pullback will be the key to maximizing your returns and increasing you wealth.
In my perfect world, we get a good correction in the coming quarters, and fluffed-up stocks come down to earth and core investment stocks present better entry points.
A consolidation at lower prices with an attendant selloff in commodities because of a global growth slowdown in 2014 would be a flashing green light to load up on both equities and commodities for the next bull market leg higher.
I'm in the market and I'm doing what I recommend here.
I'm thrilled with my stocks' performance but I'm not greedy; I'm raising my stop-loss orders to lock in profits on a 5% pullback in the market and up to a 15% pullback in most of my individual stock positions. I'm adding to core positions on any dips.
And, yes, I am hopeful we get a correction. Why? Because I want to apply the sidelined cash I've been sitting on (amassed by taking profits on high fliers) into cheaper shares and load up on the way down with the "dry powder" I'll have from my stops getting hit.
Why? Because this is just the first leg of a global generational bull market.
I want to retire - and retire rich - on the money I'm going to make in the markets in the next five to 10 years.
Whether or not you're near retirement, you can pocket the same gains by knowing this bull market and sticking to your plan.
