Thursday, March 25, 2010

Over Bought

After the debacle of 2008 the rebound in 2009 of the stock market feels to many like a resumption of business as usual on the inexorable path upward. Unfortunately once the human feel-better psychology and sentiment is peeled back we are again in on of the most over bought, over valued markets ever.

In 2007, prior to the market collapse, stocks were an extreme valuation with rich valuation multiples measured with inflated, abnormal profit margins. With investor belief that 2007 represented a norm forecasting a decline to more historically attractive levels presents a significant challenge. However for the true investor (as opposed to speculator/trader) the market risk is not worth taking when measured against a reasonable sustainable outcome. The combination of valuation, market psychology and action should not entice fresh money off of the sidelines and currently invested money should remain defensive.

We have lived from bubble to bubble for quite some time and are conditioned to expect the next bubble to be profitable and benign. Much like the tech and housing bubbles before?

The challenge for investors now is to have patience to an extent anathema to our CNBC conditioned primitive brains.

John Barnyak
Stonehouse Asset Management