Below is an article I wrote about three years ago. After reading it, I realize that I was on to something when I published it. I asked and tried to answer the question…Is it time to sell stocks? I highly recommend this article for anyone who is thinking about selling out and maybe even shorting the market. I came up with quite a few reasons to beware, but COVID-19 was not one of them. It truly was a black swan event that people couldn’t predict. Let me know what you think in the comments and don’t forget to sign up for my Youtube videos and my newsletter packed full of free premium stock picks.
It been real, it’s been fun, some would even say it’s been exciting, but is it time to sell stocks for good and lock in our profits and end this madness? We all know that the current bull run has gained some momentum since President Trump was elected and the markets are reaching new highs everyday. But you have to wonder how long can this trend for the stock market continue? In trying to figure out what my own personal next moves will be, I have decided to take this question on and try to formulate an answer based on fundamentals and a bit of technical analysis. I will be referencing the S&P 500 and not individual companies for this research.
Let’s start out with the easiest way to judge where the market is at this particular moment in time when it comes to trading. The first thing I want to consider is the actual price to earnings ratio of the S&P 500 compared to the historical average. Take a look at the chart below and you can see that we are starting to get into a danger zone of sorts. In considering what the S&P 500 price to earnings ratio should be, I took the lifetime average and got rid of the outliers and found that it should roughly be 15. That tells us that if the current p/e of the S&P 500 is below 15, we have a buying opportunity and if it is above it, we should consider selling. I realize there is much more to it then just looking at this number, but it is a good way to start your fundamental analysis of what you should be doing with your investment dollars.
So back to the chart we go to help answer the ultimate question of is it time to sell stocks now. With the current S&P 500 ratio sitting at 25.78, we see that the outlook for this market to continue its climb is not looking that great based on pure p/e fundamentals. It has reached a level that has only been crossed twice in its history with both times leading to a market crash that took it back down to at least 15, if not lower. Being that the current valuation is about high, the question now is how low could the stock market drop given the right circumstances?
At this point, we know that the lifetime average of the S&P 500 price to earnings ratio is 15. Being that it is currently at 25.78, let’s figure out our potential losses if the market decides to correct itself back down to this lifetime average of 15. For the market to get back to a P/E of 15, it would need to drop by 41.8% from its current level or earnings would have to go through the roof. The question we need to ask ourselves as investors is, which one is more likely to happen? I am at this point in the research for my own investments. I have done some very aggressive investing as of late from the “Trump Effect” and have been able to earn a few bucks in stock price appreciation. In case you are wondering, I have been heavy on T-Mobile (TMUS $63.74) when I bought it back in January. But that will be discussed in a different article shortly.
Is it time to sell stocks based on all the negative press we are seeing lately? You can look on any news site or paper and see a ton of bad press towards this administration. But does all this bad press equal a bad future for the stock market? I am here to say that it does not by itself equal a guaranteed recession. If you believe in a contrarian thought on the news, then you may want to put all your money in the market. With everything being so negative lately, it would seem that the bottom is going to fall out of the market. But this is something that all traders will have to figure out for themselves based on their own personal preferences.
At this point, you will need prepared to for the worse going forward. I would highly suggest doing some protection against the gains that we all have enjoyed over the last 8 to 9 years. Don’t be afraid to buy a few put options to guard against a sudden HUGE loss in the market from say something like a sudden war or increasing interests too quickly and putting the brakes on our economy and thus the world economy. Or we can throw out a shut down of the government to a growing list of things that we need to worry about as well. The last time that happened the market stayed flat to a bit down as well. My point here is that we have a ton of downward pressure items pushing against my portfolio going higher with the standard long positions. Tread lightly and don’t be afraid to buy a bit of insurance in the forms of market put options to give you a little more ease at night when you are wondering “is it time to sell stocks for good?”.