Yes, Stocks Will Go Down Again

04/13/2010 12:00 pm EST

Focus: MARKETS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of Making Money Alert, warns investors not to throw money at this aging rally but to wait for a correction, when stocks will be more attractively priced.

There's no denying that this market currently is immersed in the strongest up trend we've seen in the past decade. Stocks have made a miraculous recovery off the dramatic lows of March 2009, and now it feels like stocks will never go down again. Even in the face of bad news, this market keeps pushing higher and higher.

One reason for this constant push higher is the number of professional money managers that have been underinvested during the sharp run-up. I know firsthand how this feels, as I have been very cautious about adding money to the market here.

Now, despite the seemingly endless move higher in stocks, whatever you do, please don't be lulled into the misperception that stocks aren't capable of a fast and furious correction. Right now, with the market trading so far above its respective 50- and 200-day moving averages, you have to be even more cautious.

During bear markets, I see investors throw in the towel and jump out of stocks right at the market low. Now, I'm seeing the opposite happen, with investors finally capitulating and just throwing their money into stocks at these elevated levels. I caution you not to make that mistake. If you're feeling like you are underinvested, believe me, you are not alone. I'm there, too, and I know it's not the greatest feeling.

Just keep in mind that you don't want to put money to work now based on emotion, or on fears of missing the boat. There always will be opportunities to buy, and at much more attractive levels than we see right now. The best action for you to take if you feel underinvested is to [be patient] and just wait for the inevitable cool down of this red-hot market.

[Meanwhile,] if you haven't paid much attention to bond yields lately, I have a news flash for you—long-term Treasury bond yields—i.e., long-term interest rates—are on the move.

I think this trend could be with us for some time, as there is just no way to avoid the mountain of debt that will be issued by the US government in the years to come. Higher interest rates inevitably will lead to higher taxes, and higher taxes could put a serious hurt on corporate profits.

The endgame of this pernicious cycle is that equity prices will come under pressure, and that means hard times for the bulls going forward. Sure, there's a party raging right now on Wall Street, but if we see more interest-rate creep, it could mean lights out on this rally.

Subscribe to Making Money Alert here…

Related Articles on MARKETS