“time to de-risk”

“the market is stretched”

“time to take profits”

“stocks are overbought”

“the risk is worth more than the reward”

“time to take some money off the table”

These are all phrases that you hear when the stock market is rising.  You may hear these phrases on financial television, in the newspaper or even from your financial advisor.  No one wants to lose money – I think we can all agree to that.  So these phrases speak to us on a psychological level.  They make you think, “the market has gone up quite a bit and I really don’t like losing money so I should probably listen to this guy and sell something”.  Taking profits is the prudent thing to do TODAY.  End of story.

But wait a minute.  Is there any data to back up this decision?  Has the guy telling you to sell actually done any research on his recommendation?  Or is he just trying to sound smart in front of his audience?  Always watch out for people making recommendations without any actual FACTS.

The first place I would start my fact checking process is by looking at how past markets have performed under similar circumstances.  Many people have access to decades of market statistics and can easily run a search asking, “when has this happened before and what were the subsequent returns?”.

So here is where we are today*:  In the S&P 500 we have gone over 117 trading days without a 5% correction AND we are two full standard deviations above the 200 day moving average.  Sounds like its “time to take some money off the table” to me.  But lets look at what the S&P 500 has done under these conditions in the past…(info and chart from www.sentimentrader.com – I love his work!)


We can see here that the S&P 500 has only experienced these conditions seven times since 1927.  We can also see that the median returns for various time frames up to one year in the S&P 500 after this occurrence have been nicely positive!  The one year returns are really the standout – they show us that when these conditions occurred in the past, the S&P was positive 1 year later 100% of the time with a MEDIAN return of 18%.  Those are great numbers!

Of course past returns do not guarantee future results and we have no idea what the market is going to do in the future, but looking into the past gives us a window to how things might turn out this time.  I’m not saying the S&P will be up 18% a year from now or down 18%.  What I am saying is that looking at the past data, the evidence tells me that “stretched” markets seem to stay “stretched” for extended periods of time and that losses resulting from this “stretched” condition are anything but certain. 

If you are a long term investor, I would be wary of anyone telling you to “take some money off the table” because the market is “stretched”.  The evidence shows that simply having an “overbought” market is probably not enough of a reason to take less risk in your portfolio.   


**The above article is informational in nature only and is not a recommendation to buy or sell securities.  All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information.  All investments carry a degree of risk.  Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.

***Securities and Investment Advisory services offered through Ausdal Financial Partners, Inc, 5187 Utica Ridge Road, Davenport, IA 52807 (563)326-2064. Member: FINRA/SIPC. M.Brown and Associates / M. Brown Financial Advisors and Ausdal Financial Partners are independently owned and operated.