Whenever US stocks hit a record high, talk eventually turns to when the party will end. This is natural, as people are always looking for an excuse to cash out their profits. While people don’t want to miss the party and the chance to make money, investors are wise to pay attention to signs that the upswing will end.
This is a very important aspect of making money with stocks. It’s not enough to call an upswing, or to recognize buy signals that allow you to ride stocks up. You also have to pay attention to signals that tell you when it’s a good time to cash out of your positions. It’s not uncommon for investors to stay in the market too long. As a result, their paper profits remain exactly that–paper profits. When investors stay too long, their paper profits evaporate and they have to wait until their stocks appreciate again so they can exit. In many cases, the stocks appreciate so high that they feel that they would lose out if they leave the market. So they opt to stay in again, the market dips again, and the whole process repeats itself. If you are looking for strong exit signs, here are just three that you need to pay attention to.
The strong US dollar is hurting American exports, because it can hamper American companies’ competitiveness abroad. While in itself, the US dollar isn’t enough to cause a recession, its impact on the earnings of American multinational companies can send shock waves to the economy, which brings us to the second factor you need to pay attention to.
The earnings of the S&P 500 index are quite disappointing. If you look at the earnings projections for 2015 and beyond of S&P 500 companies, you have every reason to worry. Most of the outlook and guidance for 2015 are either straight up negative, or flat, at best. This is a big red flag indicating that the strong US dollar as well as weak spots in the general US economy are putting a lot of pressure on earnings. When earnings fall or flatten, PE ratios get overextended, which is a serious problem. This brings us to the third factor.
It’s already well-known that the current stock market is overvalued. PE ratios are through the roof. Depending on your risk sensitivity, it might be safe to say that at current valuations, the US stock market is too expensive. Some alarmists will say that we are in bubble territory. Put all these factors together, and you will see how they feed into each other. It only takes a fairly moderate external shock that comes out of left field to cause some serious pain in the market.