Believe it or not, but the stock market is selling off.
Yesterday, the S&P 500 declined by 3.44%, while the recent best performer, the tech-heavy Nasdaq, dropped by 5.07% in one day.
Of course, that doesn’t surprise me. Valuations have been high for a while.
It is also why on Tuesday, I advised my True Retirement Wealth subscribers to take in some profits from the best-performing tech names.
Likewise, I warned you on Monday that Tesla resembled Bitcoin in 2017, and that the price makes no sense. I hope you listened to me because the stock has declined by 20% since.
Because of such significant corrections in the tech space, many are now panicking, saying this is it. We have reached the top, and a crash is upon us.
Could they be right? Let’s find out.
How Extraordinary Is This Correction?
The first thing you should understand is that no bull market goes up in a straight line.
There are always corrections on the way whenever the market overextends itself.
A typical one results in a 5-10% decline. If there’s a larger shock to the system, which is less frequent, then you might see a 10-20% correction. And in rare cases, usually once in a decade, the market will drop by 20% or more.
Since a large shock wasn’t the culprit behind yesterday’s correction, we are, for now, probably looking at a 5-10% correction only.
Furthermore, the Fed continues supporting the market. It currently owns roughly 23,000 different securities, making the U.S. central bank the largest investor in the world. With the ability to print money out of nothing, it’s safe to assume the Fed will continue purchasing stocks, regardless of the price.
Meaning, it’s too early to panic.
That said, I remain a firm believer that stocks are overvalued, and at some point, valuations matter.
Every bubble pops eventually, even a Fed-supported one.
Should You Buy, Sell, Or Invest In Other Assets
For the time being, this bull market remains intact.
Yes, alarm bells are ringing that the market is irrationally exuberant. But so far, the price isn’t signaling a larger correction.
For that to happen, the S&P 500 and Nasdaq would have to drop by about another 5%.
At that point, they would close below an important technical support line, which would undoubtedly spur further selling, and a larger correction.
That would be the time to panic.
For now, I would suggest you remain cautious.
Significant headwinds are coming our way in the fall, in the form of elections and a potential second wave of COVID infections. Both could have major consequences on the stock market, and you don’t want to end up on the losing side.
There’s also no point in chasing stocks at this point. They remain overvalued, thus presenting a poor risk:reward investment.
For me to become bullish on the stock market once more, I would have to see at least a 20% correction. Anything less than that, and I’m not interested.
The investment that I remain most optimistic about is real assets.
Gold and silver look excellent. You can read more about why I think so here.
Furthermore, I think the next twelve months will be perfect for buying real estate. So, if you don’t have any money invested in physical property, you might want to consider doing that.
Finally, I remain bullish on Bitcoin.
Sure, it’s a riskier investment, but the risk:reward is extremely favorable. I see Bitcoin reaching at least $40,000 in the next two years, a 300% increase. On the other hand, I don’t think it can decline by more than 50%.
You can read more on that topic in the August issue of my True Retirement Wealth.
Good investing,
Leon Wilfan
For Cashflow For Retirement
