Last week, I wrote about Apple’s round-number road block. While I’m not too terribly concerned about Apple, mostly because it still has a low valuation relative to its peers, I have lately been keeping an eye on another round number that sends chills down my spine.
As you can see, the S&P 500 has been on cruise control for about two years now. There hasn’t been a large pullback, and there hasn’t been much volatility. And recently, the S&P reached 1991, less than half a percent away from virgin territory of 2000. Since then, it has pulled back 2.6%, which is perfectly fine and healthy. However, the next couple of weeks will have me setting on the edge of my seat. If the S&P re-tests that 2000 level and fails to break through it, traders that have ridden the wave up from S&P 700 in 2009 might start to get a little bit trigger-happy.
The market as a whole, at a current CAPE of over 26, does not have Apple’s low valuation to fall back on. The market is already historically expensive, which means that there is not much to justify continuing to indiscriminately hold stocks once the upward momentum is broken and the market starts to turn south. There’s no way of knowing if S&P 2000 will be that turning point, but I have already positioned myself as if it will be. Right now, my portfolio is about 51% long stock positions, 7% short stock positions, and 42% cash.
I’m no alarmist. Would it surprise me to see the S&P make it to 2200 by this time next year? Not really. Would it surprise me to see S&P 1500 this time next year? Not really. I honestly don’t know what’s going to happen, and these are the times when I try not to force anything. There’s no harm is raising my cash position, laying low, and watching for my next opportunity. I like certain individual stocks, such as Bank of America and Melco Crown Entertainment, and I dislike certain stocks, such as Amazon.com and Adobe Systems. But mostly I’m feeling pretty indifferent about stocks lately, which is telling me it’s time to raise cash.
I doubt I will be initiating any new long positions any time soon, unless I stumble upon some major opportunity that I have previously overlooked. I might add to positions that I already have under the right circumstances, but for now I’m just watching and waiting.
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