This is a daily chart of the S&P 500 index which shows that it is now higher than the record high in February and is very close to being overbought once again, a rare occurrence for such a large index. As you can see, using a bit of amateur charting, it is now also top of the six-month trading range if not busting out to the upside.

There is a natural human investor assumption of “mean reversion”. What goes up must come down. On which basis we are all now watching this blow off and wondering when the sell-off is going to come.

But selling because something has gone up is the most amateur of mindsets and typical of human wiring which is not naturally engineered for investment.

As any technical aficionado will tell you, you buy things that are going up and only sell them when they go down. On that basis my humble advice remains the same as always, don’t bother trying to predict the top of the market, wait for it. The trick to that is twofold:

Being vigilant - A classic weakness of the average investor is complacency. Believing everything is okay when in fact it is exceptional. The US market is up 58% in 2 ½ years. This is not normal it is great. So do not take it for granted. The higher it goes the more vigilant you need to become, not the more relaxed. The air gets thinner at altitude. When a sell-off comes it will happen more quickly and more sharply than it will at low altitude. And the higher the market goes the less of an excuse it will take to knock it off its perch. So keep watching, more so at higher levels. Even though it’s not allowed, keep that mobile phone in your golf bag just in case it all goes oblong halfway through the round.

Be prepared to act when it happens - Another very costly investor weakness is inaction. Watching markets fall, or a stock fall, and not doing anything about it is second-rate. The stock market is not a weighing machine (as all those Buffett quoting puritanical value investors tell you it is in order to excuse themselves from having to time the market) it is a voting machine.

Sentiment is a huge and enduring factor. It can swamp value for long periods. You have to gauge it just as you do value. Value is easy, its numbers. Sentiment is hard, it is ethereal. But that doesn’t mean you can’t respect it as many don’t. You are not buying a company when you buy a stock you are buying into a share price journey which includes sentiment as well is value factors and you cannot operate on value alone. You might as well put blinkers on if you think value is all you need to focus on.

You don’t have to believe me, hopefully a lot of investors don’t, but those of us who are realistic about the stock market need to react to changes in trend not sit there with our thumbs up our a@#$ quoting people far smarter, richer and patient than ourselves. You can afford to ride the parabolic moments in the market just so long as you have the clarity of mind to change your mind when it looks like ending. We appear to be going parabolic. We all saw in February how quickly that can change. Do something when the time comes. Denial is a very expensive luxury that only the very wealthy can afford and the deluded will endure.



Comments

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Justin Sazegar

"You are not buying a company when you buy a stock you are buying into a share price journey". Masterchef cliches aside, this is solid gold. Good luck on your share price journey, Marcus.

Graeme Holbeach

This seems to be saying that we need to watch out and act, but doesn't say what we are watching out for. Is it something to do with the red and blue lines? Would be nice if the lines were were labelled. Are they RSIs? Sorry but I don't think this article is not up to Marcus's usual high standard.

romayne louey

Very practical appraisal. It never ceases to amaze me that prices go up and down around reporting season in particular, on companies with good solid fundamentals, just because the market got it wrong.

Sean Rapley

Marcus, thanks for your article. I am glad this article was published, because it is similar to the article you published just prior to the February correction. If I am not mistaken, in that article, you advocated you sell half your portfolio if the market falls more than 3% in a day, and sell the remianing half if the market falls another 3% in a following day. In February, I believe these two condiitons were triggered. Had investors followed this advice, they would of left a lot of money on the table. I would argue it is impossible to pick the top, and only in hindsight will we be able to recognise the peak. I acknowledge that I am not clever enough to pick the top, but what I hope to do is identifty great businesses, with great leadership, and good value. I accept I may be wrong a lot of the time, but over time, I can succeed by hold great businesses, over the long term. Reducing the trades I make will also reduce the errors I make, as I know I am hopeless at picking the top. Regards, Sean

Richard Rouse

As an long time investor and admirer of Mr Padley's writings, I hesitate to criticise, but I feel ha has failed to answer his own question in the above aticle i.e. when to sell a high flyer. I have a couple of stocks that have increased in value by >500%. They go up and down daily, but so far the ups have beaten the downs. How do I tell when they have reached their peaksI am not a trader, but a lot of stocks I have sold for various reasons turns out to be a mistake. I bought CSL in the float for $2, and sold two years later, having doubled my money, for $4 ! There are other examples I could quote. Right now I own CTD and APT among other big gainers, and am confused as to what I should do. Richard Rouse

Elizabeth Palmer

I do not understand the article. At first I thought you were saying not to take flight and later it seems to say SELL. Sorry, it is my ignorance, not your article, but please help my understanding this. Should I/sell things that are up 64% in the last 10 years for instance? Thankyou.

Mike Finley

So true about sentiment,especially when there are many relatively inexperienced investors with small holdings involved. Then a panic situation can take hold and all questions about value and logic disappears in the mad scramble to sell-sell!!

Simon R

Hi Marcus, as a Buffett quoting puritanical value investor I feel obliged to jump in here. “selling because something has gone up is the most amateur of mindsets” I must have missed the memo where Buffet said “if a stock goes up, you should sell it!”. I do recall him saying his favourite holding period is forever, which almost sounds like the opposite of your supposition. “The stock market is not a weighing machine, it is a voting machine” So Ben Graham said “In the short run, the market is a voting machine but in the long run, its a weighing machine.” Given your focus is evidently on the short run, I’d say you’re in violent agreement? “Sentiment is a huge and enduring factor.” Agreed! “It can swamp value for long periods.” Sorta agree, depending on what you mean by long… “my humble advice remains the same as always, don’t bother trying to predict the top of the market” Wait, what, are you quoting Buffet now? “Value is easy, its numbers. Sentiment is hard, it is ethereal” Um, I feel like you might’ve jumped ship to the pro-value camp at some point? “Do something when the time comes” Promise to ring the bell for us? Thanks! “Denial is a very expensive luxury that only the very wealthy can afford and the deluded will endure.” And I thought it was a river in Egypt! Sorry, I’ll show myself out now…

Alex Teoh

I like the way you express a scenario. I am a positive thinker so I will decipher and think over what you are trying to show us, and see how I can apply your pointers to grow up. THINK, analyse, digest, formulate your own plan, take action AND GROW RICH hopefully. Investing in the share market is more ART than science. Painting the right portfolio can take lots of time and efforts.

jon dixon

As a financial planner I appreciate as much comment and expert ideas that I can find. Thanks Marcus for the information over the years. Yes I sold off too much CSL over the last 15 years. Yes I missed the sell-off this year by one day as the amount of compliance required to do this for ours clients was a three day event....we did sell off some and we did buy-back cheaper for our clients. I always say trying is better than watching the World go by and unless you take a profit there is nothing worse than watching a paper profit turn into a loss. We sold off 25% in CSL at $200 for our clients only to watch it go to $220 +...Mr Wrong/Mr Right...only the future will tell who you are and in my job it changes daily !

John grigsby

Good advice! Selling down during a downtrend is cheap insurance....would you not insure your house in case it burnt down to the ground?