Up Against the Sky!

The Wall Street adage is that stocks do not climb to the sky. More than a few already have. Trillion-dollar capitalizations are no longer unfathomable but accepted. Some price charts look like the definition of parabolic moves, i.e., price appreciation has accelerated at steeper and steeper angles in shorter and shorter periods of time. This type of action is seldom sustainable. Certainly, to project further price acceleration seems foolish and tantamount to climbing to the sky and beyond.

There are two basic ways that this type of extreme resolves itself. The first is that a massive correction brings valuations and prices back into better alignment with reality. The second is that time without further price appreciation, while the rest of the market advances, eventually bring things back in line. Usually, a combination of both is the mechanism that works to create a better balance.

The Bull and his partners believe that the latter is most likely, although a correction cannot be ruled out. Valuation extremes are not good indicators of timing. What seems to be extreme can go higher and last longer than most investors can imagine. However, time is a good leveler, it is just difficult to judge how long it will take.

At Riverplace Capital, we employ processes to mitigate downside risks. Diversification and allocation limits are among those. Monitoring the technical condition of the stock market is another. We are not crying out that the sky is falling but are merely on guard for adverse events. In the meantime, stay steady my friends.

-The Lonely Bull