By: Tim Fortier — July 14, 2021
Don’t Listen to TINA!
Today I am going to suggest you do something slightly rude...
When you hear TINA brought up in a conversation, shut your ears. Don’t listen to TINA.
Chances are you know the TINA I am talking about. She's the one whose name stands for: There Is No Alternative.
It’s the seemingly default argument from market prognosticators on why we all should own stocks.
The argument goes that with the Fed keeping interest rates pegged practically at zero, then you simply have no other choice than to own stocks.
First of all, beware of one size fits all investment advice.
Bull markets do a great job of erasing the memory of investors so let me jog that mass of neurons in your head and remind everyone that stocks do not always go up.
There have been long periods of time when the stock market return has been zero or less. (Pssst - TINA does not want you to know this)
A Few Inconvenient Market Truths
Between 1929 -1932, the stock market lost 84% of its value. It then took 30 years to recover.
Yep, that’s correct. Investors had to wait until 1959 to break even. And many companies went bankrupt during this period so chances are most investors lost a ton of money.
The 1966 -1982 bear market lost 72% of its value before eventually recovering by 1995 -- 29 years later!
The 2000-2002 bear market lost 37% of its value and took 13 years to recover. (The 2000-2010 period was called the “Lost Decade” for a reason.)
The 2007-2009 market correction lost 50% of its value and it took nearly 6 years to recover only after massive central bank intervention.
Back to TINA...
The primary argument for TINA is that the Fed has your back. Just trust the Fed to keep the wind to your sails.
The problem with this is that it ignores the reality that the stock market is overvalued on just about any measure you'd care to look at.
Last week I shared with you a graph of the Buffet Indicator which shows that the current stock market is valued at 234% of GDP. That makes it the most expensive market in history.
Now, here are a few more valuation models that also show that the U.S. Equity market is priced beyond perfection.
Currently, 11 out of 15 valuation factors show the market fundamental metrics in the 100th percentile historically.
(Click any image to enlarge)
It’s important to understand that valuation models are not meant to be timing tools. After all, markets can stay “expensive” for a very long time. But what the models can provide is a reasonable picture of future expected returns over the coming years.
And right now the message is not a good one for the investor who simply wants to buy and hold the market.
Consider that the market is now even more expensive than it was in 2000, just before the lost decade.
This fact alone should weigh heavily on any investor who uses (or will soon use) their investments to support their living expenses, i.e. retirees individuals.
A declining market with low-to-no-returns can mean that many investors could run out of money.
Listening to TINA and going “all-in” at a time when the market is at one of the most extremes ever in terms of valuation could easily lead to losses that could be irrecoverable in both time and money.
Fortunately, you do have alternatives. So it’s time for TINA to take a hike.
First, simply changing your approach to the market could make a world of difference.
Instead of blindly buying the market with the “hope” that it works out, because TINA said to, what if there was a way to hope for the best but be prepared for the worst.
There is such a way. And it's the same way I have been managing money for over two decades. And it’s how we approach the market here at TMI.
As an investor, you must always invest in line with what the market is telling you to do and not with what you “want” it to do.
And the current market is throwing off a lot of warning signs at the moment.
Right now only 10 out of 45 sectors are controlled by buying (demand).
You can see that clearly when you look at the U.S. Industry Bell Curve.
This indicator (which you get when you join our data platform, Sector Prophets Pro) shows us which sectors are under the control of the bears, or Supply (the ones colored red), and which are under the control of the bulls, or Demand (those are colored blue).
The mainstream financial media is of course reporting the record highs in the market.
What they are NOT reporting is how weak the breadth is. Again, ONLY 10 sectors are bullish at this time! That is not the sign of a strong bull market.
The Cumulative Daily Advance-Decline Line tracks a running total of daily net advancing stocks minus declining stocks on a particular underlying index.
It is perhaps the most widely-known market breadth indicator and it is used to spot divergences relative to a general market price index. With the market making new highs we would look for this to also be making new highs.
Except it's not...
Within the Nasdaq Composite, the Cumulative Daily Advance-Decline line has been range-bound, even though the index itself is making highs.
On the NYSE we can see how more and more stocks are slipping below their 50 day moving average.
As recent as July 7th, only 40% of stocks trading on the NYSE were above their 50 DMA. This too is indicating underlying weakness. (Notice that similar divergence preceded the Covid 19 crash of last year).
I will end today’s article with a quote from one of my favorite trading books, Trade Like a Stock Market Wizard, by Mark Minervini.
“Undisciplined players looking for “action” always show up at the poker tables. The stock market is no different except that most stock market investors are even less disciplined than most poker players.
The Achilles’ heel of most gamblers and speculators is the desire to play every hand, a common human weakness that allows impatience to override good judgment.”
“In the stock market, you have the luxury of being able to stay on the sidelines, free of charge, observing and waiting for the most opportune moment to wager. You get to see the market’s “cards” before you bet, free of charge. This is a wonderful advantage, yet few exploit it.”
It’s OK to hold cash when the market is not giving you an ideal entry.
And it's OK to ignore TINA.
Until next time,
Editor, True Market Insiders