Should We Be Worried About Too Much Optimism?

Today as I scanned the headlines and browsed the comments relative to the market, it was interesting how much optimism exist towards the broad markets currently. Just yesterday the reaction to the Fed minutes was one of worry and distrust. Today some positive economic data and we are off to the races again. Forget the Fed comments just buy!

This prompts the question, are you worried about too much optimism towards stocks? There are definitely no shortage of optimist/bulls currently when it comes to the broad markets. I have seen projections in the 2000-2075 level on the S&P 500 index by analyst for 2014. That equates to 15-20% returns and for me that seems a tad optimistic considering the data points we have experienced of late. The sentiment are very positive for the year and that in and of itself worries me. I would like some pessimism to balance out the optimist, otherwise the market will price in the optimism too fast leaving the market ‘overvalued’. Which in turn invites speculation and down the slippery slope we go. I believe the best approach now is a guarded approach… manage your risk currently and watch how it all unfolds.

What about the ignored data? On Thursday the Flash PMI was better than expected and gave investors more optimism to buy stocks. What about the housing data released on Wednesday that showed a 16% decline in housing starts? Since November the data points have not been overly positive, but despite that the willingness to put money to work has been nothing short of amazing for stocks. The fact remains, the data has to improve if the markets are to continue their wild ride to the upside.

How about some consolidation? We talked about the optimism and we talked about the weaker economic data, what it the two manage to balance each other going forward? From my view that would equal consolidation or a sideways period in the markets to digest the move off the February 3rd low. Balance is always a good thing for up trends as they keep the markets from becoming ‘overvalued’ or ahead of themselves. As stated above we will have to watch and see how this plays out moving forward.

It is easy to say the markets are ahead of themselves or overvalued, but the challenge comes in managing the risk of the market in light of what is taking place without validation. That is where the patience and need for confirmation comes into play. Bottom line… we have to take it one day at a time, one event and report at a time. We adjusted stops last night to account for any further reaction or aggressive selling from the FOMC minutes. Now we will make adjustments for today’s activity.

Tomorrow is another day, watch for the morning update for what we are watching relative to opportunities and risk management.