Market Crash Coming?

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I feel uneasy to talk about this, since I always advocate investing for the long term and be in diversified investments while ignoring the noise.  However, I have been slowly selling my stocks in my taxable investment account and I would really feel bad if I did not say anything and what I predict really happened.  So here goes.  I’m selling because:

  • The stock market has been on an huge upswing lately, so it’s a good time for me reduce my risk as I’m planning to buy a house within 1-2 years.  While I firmly believe that the stock market is always the best possible investment when the time horizon is 10+ years, it could be very volatile in the short run and I don’t need the stress because I want to buy a house no matter what happens to the S&P 500.
  • The other, which is the main reason why I’m scaling out, is because I feel that the market is potentially going to go way down.  Everyone these days are feeling better about the housing market, and in turn the stock market.  Unfortunately, the mid to upper housing market in Southern California is on the verge of a huge crash due to the flood of foreclosures that are coming.Some of you may know that the local and federal governments have put out memorandums to delay foreclosures in September of last year but as those ended in January, notices of default went out to the market during the first quarter of this year in record numbers.  Since foreclosures usually come onto the market around seven months after a notice is sent, it means the troubled house listings will flood the market starting July of 2009.  More supply, lower prices.  Lower prices, more problems.  More problems, lower stock prices.

    Note that I have no idea what the real situation is nationwide, and a local problem may not be bad enough for the stock market to react badly. I’m not a stock market expert nor a housing expert, so I don’t have sufficient knowledge to predict how exactly this affects the banking sector and the economy as a whole. I just know that this can’t be “good” news, and I don’t want this possible downturn to negatively affect my lifestyle. Therefore, I am selling.

    Also note that it’s almost impossible to predict short term behavior of stock prices, so the market can go up for a long time (some say the S&P 500 could get up to 1,000 by year end, a 20% increase following the 30% run during March and April) even if there is a problem waiting to happen. I just want to give you more information and what I’m doing, so you can decide for yourself.

There. I said it. Please be reminded that this is not advice. I just you to know what may be coming before you hit “buy” (a house or a stock). Good luck and may your choice turn out to work out for you.

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{ read the comments below or add one }

  • MoneyNing says:

    The stock market certainly seems like it’s going up in the next few weeks/months so there’s absolutely no reason to fight it. The only reason that it will go down will be some type of surprising news that no one expected to spook everyone. The foreclosure numbers in a couple months could be it, economy could be it, banks needing capital could be it as well but unless that happens, it’s better to stay long than short.

    I believe it’s totally misleading to think about the stock market as a leading indicator. At the end of the day, stocks are something that people buy and sell based on how they feel the underlying companies will do in the future. If the stock market go up, it means that more investors/traders believe that the companies will do better (which is tied to the economy). The reason why stocks are going up is because many people now believe we are on our way to recovery and that in a couple months, we will see the bottom in unemployment, economy and housing. This is slightly different than thinking that just because the stock market goes up, the real estate and economy follows.

  • MoneyEnergy says:

    From what I understand, Dividend Growth Investor is right…. but as we heard on BNN today, it’s going to come down to what the next earnings estimates look like. That’s what everyone is waiting on in order to see whether this rally will be sustained. Personally, I think any sustained rally will be just that – an effect of the added inflation and investor psychology. The fundamentals are not back on board yet to provide for real earnings growth anywhere.

  • The Digerati Life says:

    I have the same feeling that the market’s going down. But I’m not making any changes to my allocations except perhaps to buy into battered equities once my anticipated slide does happen.

  • Dividend Growth Investor says:

    Actually I think that the stock market is the leading indicator and not the economy or real estate market. The market went lower 3 months before the financial crisis started, and if this rally is sustained then the market would have predicted the future economic upturn as well.

  • Frugal Dad says:

    Thanks for the link. I agree with you, and definitely don’t think we are out of the woods yet. This might prove to be a temporary upswing leading to an even sharper fall. The swine flu hysteria combined with a summer-time uptick in foreclosure numbers could be a perfect storm for future declines. That said, I’m not making any dramatic shifts in my investing strategy because I’m in for the long, long haul. However, I am making a few minor shifts to avoid some of the short-term risk.

  • Jeff@StretchyDollar says:

    This is an interesting post, good stuff to think about. I think it’s important to share these types of things even if it’s just your gut feeling.

    • MoneyNing says:

      Thanks for letting me know that it was a good idea to share. I had to think about whether it was good or not to talk about it since it promotes buying and selling more than most people should. However, I felt like I couldn’t just stay silent and not say anything if I see what’s happening.

  • Erica Douglass says:

    Hi David,

    You’re not the only one who feels this way. Mish from Global Economic Trend Analysis (popular financial blog) says the market is overbought. I just put my $5K in my IRA to meet the 4/15 deadline for 2008 contributions. I planned to put it in the market, but am waiting.

    As I type this, it is about 1AM PST and the Asian markets are down on “swine flu” fears. It is likely the American markets will follow. I think, at least short term, you will find you made the right decision.


  • David Stillwagon says:

    I agree with you that the market will continue to go down and the housing market will take along time to recover. Even the old advice about holding stocks long in no longer applicable. Its very depressing to think that there isn’t any place to put your money right now except a bank where the interest is minscule.

  • IanB says:

    Anyone understanding the importance of demographics knows what you say is about to come true. The only question is to what extent? As the last of the largest and wealthiest segment of the population (the Baby Boomers) evolve from spenders into savers we will see a fundamental shift in spending patterns. I, myself, do not know enough to say if it will get as bad as Harry Dent Jr. says in “The Great Depression Ahead”, but I believe anyone trying to decide what to invest their money in for the next many years should at least read what he has to say. Buy and hold as an investment strategy was designed by the financial services industry for the benefit of the financial services industry. After everything we have learned over the past year, and more, do people still think the financial services industry has the interests of their customers at heart?

    • MoneyNing says:

      IanB: Like you, I don’t know enough about everything to even attempt at what exactly can/will happen but I hope everyone by now know that no one has the interest of what’s important to us more than ourselves. I also wish (part of the reason why I started this site) that everyone spend some time to educate themselves on building and keeping wealth because our lifestyle literally depends on how good we are at this process.

      I think what happened to Japan (essentially 20+ years of non-performing housing and stock markets) is an interesting example because what happened to them (older population, extremely overheated housing and stock markets) parallels so much of what we are facing. Of course, we have the added advantage of issuing worldwide reserve currency but if we aren’t careful and abuse this, we could be in an even worst problem than what happened to Japan.

    • UH2L says:

      One thing to remember is that the Baby Boomers are beginning to pass away. Their saved money may become inherited money that gets spent. Plus, our population is still growing. That means more demand for everything in the long term.

  • Brutus Beefcake says:

    1) You had your money in stocks when you’re “planning to buy a house within 1-2 years”? Bummer for you.
    2) We should also sell in a buyer’s market? Even though “the stock market is always the best possible investment when the time horizon is 10+ years”? Bummer for us.

    Classic advice. Buy high, sell low. Get a job on Wall Street.

    • MoneyNing says:

      Brutus: I don’t think having money in stocks is really a bummer for me 🙂 No matter when you need to buy a house, everyone should always have investments in multiple asset classes.

      Like I said, I’m not trying to give advice here. I’m only trying to tell everyone what may happen in the CA housing market and what I’m doing currently based on the future.

      I fear that most of us think about the past too much when we think about our investments. The Dow was 14,000 and it’s now at 8,000, but it doesn’t mean that buying now is buying low, which everyone who bought when the Dow went back up to 9,000 in January can certainly tell you.

      I’ve been fortunate that my stocks is down about 20% from the all time highs (about 10% of our overall financial portfolio), but I attribute that to dumb luck more than prudent skill. In hindsight, it was of course better to sell everything in October of 2007, but it wasn’t really a realistic assumption to make even considering that I want to purchase a house since the home buying date is a moving target as well.

      Quite honestly, I’m as pissed off about Wall Street as you are. However, I believe that they were just acting on greed, which in a sense isn’t really worst off than all those home buyers who overstretched or many of us in society for that matter.

      We all just want to be better than we really are.

  • Mark Wolfinger says:

    You don’t have to sell investments (that you would otherwise prefer to own) just because you are afraid of a crash, or may need the money in a year or two.

    You can protect the value of your assets by adopting a conservative option strategy. In your situation I recommend the collar. For a stock you own, buy a put option (guaranteeing the the right to sell stock at a predetermined price – which you get to choose). To pay for that put option, you sell a call option that grants someone else the right to buy your stock at a predetermined, but higher than current, price.

    With collars, you can still earn a decent profit, but losses are limited. This works like any other insurance policy. You can set the deductible (maximum loss) wherever you want it.

    This is far more flexible than just selling your stocks and gives you something that selling cannot – profit potential, if stocks continue to rally. It amazes me that this strategy is not more widely used – but financial planners and advisers simply don’t understand how it works and stockbrokers don’t tell their customers.

  • George says:

    I agree. The markets will probably go down a lot more. Especially the housing market. I don’t think the government will be able to spend enough money to stop it.

    And, it’s not limited to Nor Cali. It’s in most places in the US, and many places around the world.

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