Are The Markets Getting Set To Plunge?

Even though the markets were all hitting new highs recently, we continue to see multiple days where the Dow will drop 200 to 500 points, only to spike to a new high again within a week.

Over the past two weeks, the trend has been gradually lower. Looking a little deeper, we see large selloffs in the highflyers like Artificial Intelligence shares, but we have also seen pullbacks in safer shares like AT&T and Altria.

Is this volatility portending a larger pullback, or perhaps even a bear market? Or is it just a blip on the radar that will work itself out and we rally even higher?

Back in April of this year, I published that my indicators had just provided a signal of the beginning of a bear market. And they had....for all of about 2 days. Then positive economic and political news hit the wires completely reversing the trend. Since then, the market has been powerfully moving straight up.

Thankfully, I never recommend getting out of the market in case I am wrong, and I even stated that in that April blog post. If anything when I expect the market to move lower, I typically will only shift what I own from more risky to less risky. That call may have been a day or two too early, and I should have had the patience to at least wait until month end to make it. Nonetheless, by staying fully invested in conservative issues, we still did well. This is the main reason Warren Buffett never tries to time the market. Nor does Dave Ramsey.

Once again though I find the market getting nervous after a powerful run since April. The increasing volatility we see is a sign of that nervousness. And the anxiety does appear justified now.

The S&P 500 index is currently trading at a Price-to-Earnings (P/E) ratio of just over 30. Historically, this is about double the price stocks normally would trade at. The latest consumer sentiment numbers are moving lower, and consumer purchases comprise 65% of economic activity. Also, the Fed has begun lowering interest rates, implying they also see some economic weakness in the road ahead.

In spite of the data, the economy is still growing. But we don't look to the economy to see where the market is going! Instead, it is the market that leads the economy, usually by 6 to 9 months.

As of right now, I do NOT have any sell signal or any new indication of a bear market. But I do see risks of a pullback increasing. Whether that potential pullback is just a correction or a more severe bear market, it is not possible to say.

What I can say though is that investors are finally questioning the valuations of the artificial intelligence bubble, and when any stock, AI or not, has any amount of bad news, it is taken out behind the shed and beaten unforgivingly with a lead pipe, left abandoned to somehow survive. This is typical behavior when a stock was priced to perfection.

At the end of a bull market, even bad news is explained away enthusiastically. I don't see that happening either.

What I see is an expensive market where interest rates are moving lower and helping put a floor under the market. I do not see unreasonable enthusiasm, which is typical at the end of a bull market. And I see investors reallocating from high risk to low or medium risk. The economy is also still growing because the tariffs encouraged factories to be shifted back to the United States, and many of those factories are now being built.

Do I see a plunge in the markets? No. But it is not out of the realm of possibilities for the market to trend flat for a while until earnings catch up with the high valuations. And I think a flat trend in the immediate future is the most likely outcome.

When the market is flat, stocks that pay great dividends are one way to ensure value keeps flowing into your pockets. Because of this, I have been accumulating shares in companies like Altria (MO), which I bought more of this past week. Altria's shares currently have a dividend yield of 7.3%. Furthermore, they have been aggressively moving their business away from traditional cigarettes, and into vaping products and offerings of alcoholic beverages. If there ever is a downturn, these businesses tend to increase, not decrease. And Altria has decades of history defending their dividend.

And with Altria having pulled back a little, similar to AT&T, these are excellent issues to accumulate.