“It’s a Bull Market until proved otherwise” is an old Wall Street saying. 

From what we have experienced in recent history, this old adage makes sense.  Starting in 2009 to the present, Bull has withstood negativity, fear, Greek crises, Brexit, elections, you name it and still makes its way higher. 

Many pundits say the Bull Market is long-in-the-tooth but I would answer,

“Maybe, but it is still a Bull Market.” 

While I believe the stock market will move higher, I still think a correction is in store. 

Last week on June 9th the market-leading FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) suddenly fell about 5% during the trading day.  They have recovered somewhat but the sharp move down may have exposed cracks in the market’s facade. 

The top 15 stocks in the S&P500 are responsible for about 1/2 of this year’s total return.  Investors have piled into these large-cap growth stocks mostly through index fund purchases. 

The concentration of returns signals a very crowded trade and as fast as money flows into certain stocks, money can just as quickly flow out. 

Overall market volatility is muted

Despite the June 9th decline in the FAANGs, the overall volatility in the market was muted. 

Investor confidence in the government’s ability to pass favorable tax, regulatory, and infrastructure legislation has created calm. Why sell when policy will increase economic growth and corporate profits? 

This attitude is fine as long as “when” does not become “if”.

The market has been very patient as to-date no such legislation has been passed.  If doubts creep in, or if the bills that make it are less than expected, disappointment could take stocks down.

Many investors since 2009 have made well thought out lists of why the market can’t go higher.  They have, since 2009, been wrong. This is why I am still running with the Bulls. 

Leery of crowded trades

I am, however, very leery of crowded trades and right now investors seemingly can’t get enough bonds even when rates are so low. 

Investors can’t get enough of the S&P500 Index ETF and Index funds. 

Asset prices decline when the buying runs out.  Until then, prices will move higher. 

Parts of the market are struck with negativity

While the FAANGs try to regain their upward climb, there are parts of the market that are struck with high levels of negativity. 

Energy stocks have been laggards as ample supplies of oil keep crude prices under $50 a barrel. 

Retailers have been taken down on fears that Amazon will put them all out of business. 

Similarly, low commodity prices have kept investors away from agriculture related companies. 

I once heard a well-known investor say that to be successful it is necessary to have a portion of your portfolio that is working today and a portion that will work tomorrow. There may be an opportunity in looking through forgotten stocks and maybe raising some cash as the stocks that are going up to move higher. 

June 9th is telling me that near-term caution is warranted within a market that has room to move higher over the longer-term. 

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.