“We Have a Stock Market Bubble.” Now What?

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We have a stock market bubble.

That’s what former Fed Chair Alan Greenspan told Bloomberg TV last Wednesday during a second day of what turned out to be the beginning of a jarring market pullback.

Jim Paulsen sees the possibility of a 15 percent correction. Goldman Sachs said conditions point to a correction of 10% to 20% in the next few months. After Friday’s big drop, I suspect more prognosticators are going to hop onto the correction bandwagon.

But the script remains the same. Despite what the financial media are saying, what we’re seeing is normal stock market action. As last week proves, gravity still exists. Stocks can go down. Life goes on…

The fact is, no one can predict whether stocks are going to go up or down on any given day.

And it’s only natural to get nervous when you see the market drop. So today, I’m going to try to rescue you from the beast.

If you take a few minutes to think about the market differently, you can save yourself a lot of misery and even protect your portfolio.

Let’s get right to it. Here are three things you can do to keep your sanity as volatility returns to the markets:

1. Stop staring at the stock market all day.

It’s tempting to track your favorite stocks all day. A decent online broker now gives you access to millions of ways to absorb real-time data. Anyone with an internet connection can get up-to-the second quotes and one-minute candlestick charts.

Don’t do it.

I understand the temptation to set up 24-7 surveillance on your stocks. But you can’t will your positions higher. There’s no point in checking in on your 401(k) every 30 seconds or holding your breath every time the Dow lurches 10 points higher or lower.

That’ll cause you to make terrible snap decisions that ruin your trades.

Unless you’re daytrading, that blinking real-time chart is nothing but trouble.

2. Keep market moves in historical perspective.

The S&P lost 60 points on Friday. That adds up to a drop of more than 2%.

That’s far from an actual stock market correction. But it sure feels like one to the wired investing class spoiled by the market’s smooth ride so far this year.  The record run of low volatility we’ve enjoyed has twisted our perspective. Even the smallest moves lower feel like a big deal.

But if we take a wider view, we can see that last week’s drop is far from significant.

At the end of 2017, I told you I believed the market would continue its run this year. But I also noted that to post another strong year, stocks would need to correct along the way —maybe more than once.

Consider this: Since 1946, the market has corrected at least 10% on 31 separate occasions. A drop of that magnitude isn’t as rare as you might have thought…

3. Finally, the market will do whatever it wants, whenever it wants.

You’ve heard a lot of bubble and correction talk lately. It’s only going to get louder this week if stocks continue to slide. Bulls are trying to will the market higher, while the bears will try to talk it down.

But the market doesn’t care what all the pundits are saying on television. All these people are wasting their precious time and energy talking about what the stock market should do, instead of focusing on what it’s actually doing right now.

Tune out the noise. Shut out the talking heads. In the end, all we can do is watch the signals it fires off each day– and follow them to profits.

Sincerely,

Greg Guenthner
for The Daily Reckoning

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