| Dear Friend,
For several reasons, the bull market we have enjoyed for the last few years seems to be petering out. First, as Janet Yellen and Robert Shiller, and others, have recently pointed out, the S&P 500 average has a higher P/E, 20.7 now, compared to 19.5 a year ago, or compared to the 16.3 very-long-term average. An elevated P/E can be expected in a world of zero interest rates, but we all know that world will soon change. The question is not “if” rates will rise, but “when.”
Second, market tops and bottoms are usually marked by triple-digit moves in the averages, one day up and the next day down, exactly the pattern we have seen for the past few weeks.
Third, it is May. “Sell in May” is almost a hackneyed mantra by now (and not always the right thing to do), but the advice is soundly supported by the historical patterns.
The market might not tank in the near future, but it seems to me that a big increase is unlikely during this period when we are waiting for the Fed to act.
At Terry’s Tips, we most always create positions that do best if the market is flat or rises moderately. Based on the above thoughts, we plan to take a different tack for a while. We will continue to do well if it remains flat, but we will do better with a moderate drop than we would a moderate rise. A big drop will hurt, but not as much as it would have hurt if we had our normal bullish bias in place.
We will be making some adjustments in the portfolios this week, including selling XIV in the Contango portfolio, since volatility is likely to remain above the recent 12 – 14 range.
It is usually foolhardy to try to call a market top or bottom, but right now, the preponderance of evidence suggests that a large move to the downside is quite a bit more likely than a big upward move.
Happy trading,
Terry
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