Investors are increasingly getting jittery as U.S. stock markets remain near all-time highs. With the Federal Reserve’s monetary stimulus and a return to markets strong from unprecedented government support, the steepening V-shaped recovery has pushed changes in pricing and participation similar to ones experienced during the dotcom bubble.
According to data from S&P Dow Jones Indices, intermediate-term participation levels are the most overbought they have been since 2000. When investors buy in short-term bursts, it can lead to an unstable market, which then creates an opportunity for short-term traders and algorithmic-based investors.
In the long-run, however, this type of buying can lead to pressure on stocks as investors come in and out without holding for any appreciable length of time. Long-term investors, on the other hand, tend to take a longer-term view of markets, which can provide stability in pricing and effacement of overly volatile swing trades.
Though stocks appear to be in the midst of a historic, largely unsustainable bull run, long-term investors can still find value on Wall Street. Looking for stocks with strong fundamentals and a wide margin of safety can be an effective way to reduce risk. Investing in dividend-paying stocks can also provide a steady, reliable stream of income for the long-term.
Essentially, the strength of most stocks is often in the hands of short-term traders, and ultimately shareholder value dictates the direction of the stock market. Investors should remain diligent in risk management, however, as the top of a market cycle can test even the best of them. In times of uncertainty, investors should focus on fundamentals and consider reinvesting any dividend income they receive.
“Intermediate-Term Weakness Ahead: Overbought Participation Levels Signal Long-Term Woes
