Guard Profits

After the torrid run higher in the market, I suggest setting trailing stops to guard profits.

After yesterday’s 1.5% gain, the S&P; 500 sports a very overbought RSI of 75. Some points to bear in mind as we poke our heads into the stratosphere of overbought:

  • The economy is not as good as the rising market makes it look. Even if the recession is over, growth is going to be subdued for an extended period, and stocks have come too far for that kind of scenario.

  • There are two drags that will keep growth in check: (A) the still faltering US consumer, and (B) staggering US national debt, still growing, that will likely bring higher taxes, burdening consumers even more.

  • The market’s rise since March has retraced about a third of the bear so far, and that’s standard for bear market bounces.

John Hussman, who’s hedged into this bull rise, wrote in his weekly market comment yesterday:

To remove our hedges here in anticipation of a sustained economic recovery and bull market would be to assume that the events in the economy since 2007 have been psychological and temporary, that there will be no material effects from continuing delinquencies and foreclosures (not to mention the second wave of reset pressures due to begin later this year), and that the Fed can create more base money in one year than in the entire history of the nation, without any consequence. If we could treat the recent downturn as a “standard recession,” that might be possible. But little is standard about this downturn, and the fundamental difficulties have deeper roots than trend-following investors seem to assume.

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