The Most Important Question for Today’s Investors …

Run with the crowd … or lean against it? That’s the key question investors are facing in today’s market.

I say that because everyone and his sister is now saying that a year-end rally is all but guaranteed. They’re saying the Chinese and South American worries are overblown, and that the U.S. economy is an island unto itself – one that will go on its merry way regardless of what happens elsewhere.

They’re pointing to the October rally in big-capitalization stocks, and the marginal new high in the Nasdaq 100 Index, as proof happy days are here again. And they’re saying that even if we face some issues, cheap central bank money is enough to paper over every single one of them … so pipe down and buy!

I can understand that dramatic shift in sentiment. After all, the Dow Industrials have surged roughly 2,000 points in just a few weeks. It’s easy to believe the bullish arguments and get swept up by the herd.

And believe it or not, there ARE times when running with the crowd makes sense to do. I had no problem whatsoever recommending several stock, call option and long ETF positions in 2012, 2013 and 2014. It was appropriate given where we were in the economic and credit cycle, and my subscribers were able to peel off several rounds of profits as a result.

But one of the single best calls I have EVER made was to lean aggressively against the crowd in the mid-2000s. I let it be known — loudly, frequently and clearly — that we were swept up in a massive, out-of-control real estate and mortgage bubble, and that it would crash in spectacular fashion.

This was at a time when speculators were lining up around the block to buy condos and houses in order to flip them, often sight-unseen. This was when Treasury and Federal Reserve officials, not to mention scores of economists and experts up and down Wall Street, were saying it was all just a bit of “froth” and that any downturn would be “well contained.”  You don’t need me to tell you what happened next.

Is this a time to embrace the consensus or trade against it?

So which is it now? Is this a time to embrace the consensus or trade against it?

I think I’ve made a convincing case this market faces a lot of major challenges. I’ve pointed out that several time-tested indicators are flashing warning signs for stocks. I’ve established that the bull market that began in 2009 is incredibly long in the tooth from a historical standpoint. And I’ve laid out a series of potential downside targets, or levels where stocks arguably “should” be trading, even as I’ve made clear they don’t “have” to fall that far.

Yes, the rally we’ve seen in the past six weeks has clearly been stronger than I anticipated. But running with the crowd at these levels looks increasingly dangerous to me. Outside of a few select, high-quality, names with specific corporate catalysts working in their favor, I’m simply not interested in making like a Pamplona celebrant.

To change that stance, I’d need to see the many lagging and nagging fundamental and technical indicators out there start to right themselves. I’d need to see more breadth in the market advance, and more convincing buying power show up in more sectors. I’d need to see other asset markets start confirming the action in stocks, and see some more clarity on the fiscal and monetary policy outlook here and abroad.

That’s a fairly tall order. So for now, I’ll keep on leaning rather than running.

Until next time,

Mike Larson