Stock Markets are in for a Cold Summer!

by Brooke Thackray, Alphamountain Investments

Introduction

It is a good thing that collectively people are generally optimistic about the futureā€“ it makes life more enjoyable. Sometimes, our propensity for optimism causes us to ignore possible dire outcomes that might lie ahead. There are countless examples of people living in the shadow of volcanoes, on earthquake fault lines and at sea level.

A volcano, an earthquake and fl ooding are not inevitable. There is no surety that these events will happen. There are only probabilities that they may occur. Given that these events may happen sometime in the distant future, we tend to behave as if the events will not occur. Miami, Florida is a thriving city, and yet it is in dire danger of being submerged in the future. Currently, nearly half of Miamiā€™s population is living four feet above sea level or lower. By 2060, it is estimated that sea level along Floridaā€™s coastline could rise between 9 inches and 2 feet1. The problem with a rising sea level is not just that Florida will one day be submerged, but that Florida is fast becoming more susceptible to fl ood damage in the not too distant future. Miami is not alone, as many major cities are facing an increased risk of flood damage from a rising sea level, including New York.

Just as people tend to ignore the probabilities of increasing risk when a negative event is more likely to occur, investors tend to ignore conditions that make the stock market more susceptible to a correction. Our actions are not much diff erent than a frog who is placed in a pot of water that is slowly brought to a boil. Just as the frog does not react to incremental changes in temperature and the inevitable happens, investors tend not to see the incremental changes that make the stock market more susceptible to a correction, and therefore do not take action.

The conditions in the stock market at this time make it susceptible to a correction as the stock market is overvalued, has little potential additional support from central banks, corporate earnings that are starting to fade, and a looming period of weak seasonality. Investing in an overvalued stock market that lacks support can still be fruitful, as the market can continue to move up on strong momentum for a long period of time. The potent cocktail of less than desirable ingredients measuring the stock markets valuation has one ā€œkickerā€ that pushes the probability of a correction to the tipping point - a weak six month seasonal period from May 6th to October 27th.

The stock market does not always correct in its unfavorable six month seasonal period which historically has fewer large gains and more large losses than the other six months of the year (the favorable period from October 28th to May 5th). If there is one time of the year that makes sense for investors to lower the risk in their portfolios, it is the approaching six month unfavorable period for stocks. This is especially pertinent this year as there is a lack of catalysts to propel the market higher. A six month period of reduced risk is not a forever allocation. It may be a cold summer for the stock market ahead, but there is warmer shelter elsewhere. All is not lost, as there are investments that tend to perform well in the six month unfavorable period, including certain sectors of stock market and fixed income.

Read/Download the complete report below:

Thackray Seasonal Trade 2015 April Stocks Cold Summer Extver

Copyright Ā© Alphamountain Investments

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