Submitted by Steve Selengut
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Investment Grade Value Stocks At Highest Levels Ever!
The IGVSI is a barometer of a small but elite sector of the stock market called Investment Grade Value Stocks. Some IGVSs are included in all averages and indices, but even the well dressed Dow Jones Industrial Average includes several issues that are well below Investment Grade and very few boast an A+ rating. The S & P 500 contains about half the IGVSI selection universe, which tracks a portfolio of less than 400 stocks.
There has never been a rally that has not proven to be a profit-taking opportunity. While everything is up in price, there is actually much more to worry about than when prices are historically low. More money will be lost by people who buy into this rally now than will be lost by those who are holding equity-bucket "smart cash" in anticipation of the inevitable correction.
Every rally is different, the result of various economic and/or political circumstances that create excessive demand for financial instruments or products. This rally is longer than many I've experienced, but the symptoms of greed-based speculation are pretty normal. Eventually, the natural urge to take profits takes over.
Companies are more profitable and productive because they have cut costs and employees, not because demand is shortening supply. Fundamentals are better, but few earnings reports are accompanied by robust assessments of the future. Bargain prices in equities are totally gone, and interest rates really do have nowhere to go but up.
Here's a list of things to think about or to do while Investment Grade Value Stock prices are at their highest levels ever:
Don't buy a new yacht because you think your Mutual Funds and ETFs are unbreakable --- they aren't. While speculators continue to gamble, get yourself out of the casino.
Keep in mind that someone (MCIM followers) is selling the individual shares that the others are buying ---- yes, even those flashy ETFs. Smart selling for profit will be followed by panic selling at ever increasing losses. Remember 2008? Were you selling or buying?
There are no crystal balls, and no place for hindsight in an investment strategy. Selling too soon, for reasonable profits, is every bit as important to long-term investment success as buying too soon is during corrections.
Take a look at the future. Nope, you can't tell when the correction will arrive or how long it will last. If you are selling securities now, as you certainly should be, you will be able to love the correction even more than you did the last time --- as you find yet another IGVSI treasure chest full of diamonds (in a "rough" correction).
As, or if, the rally continues, pull the sell trigger more quickly, as opposed to more slowly, and establish new positions incompletely so that you can add to them safely later. There's more to "Shop at The Gap" than meets the eye, so when it hits the fan, get in there and get dirty --- but slowly, painfully so.
Today, only 4.2% of the IGVSI Selection Universe is down as much as 15% and less than 2% are in buying range. This is unprecedented --- so buy less than you normally would.
In looking at your income securities, cash flow is the primary concern; as long as it continues unabated, the change in market value is merely a perceptual/emotional issue. Given the interest rate picture, CEF prices are within their normal range.
Note that Working Capital has risen nicely recently ---- this will continue even after the correction begins, just a normal result of embedded cash flow. Look for chances to sell your weaker performers at sub-target profits.
Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it's easier, generally less risky, and better for your peace of mind.
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Stop examining your portfolio's performance in market value terms --- it leads to fearful, often frantic, decision-making. Keep your asset allocation and investment objectives clearly in focus and try to think in terms of market and economic cycles as opposed to calendar quarters and years.
The Market Cycle Investment Management (MCIM) methodology provides a calmer way of dealing with portfolio dislocations in either direction.
While all equity prices are up, you really need to be on your toes --- or have a reasonable profit-taking discipline. If you think 10% is too low, you will eventually lose money in the stock market.
Rallies, regardless of cause, will vary in height and duration, but both characteristics are only clearly visible in rear view mirrors. The short and steep ones are most lovable; the long and slow ones are more difficult to deal with. If you over-think the environment or over-cook the research, you'll miss the last train home from the party.
Unlike many things in life, "shock market" realities need to be dealt with quickly, decisively, and with zero hindsight. Because amid all the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never, ever, been a rally or correction that has not given way to the next correction or rally.
Now get out there and sell high(er) for a change --- the MCIM force is with you.
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