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"Irrational Exuberance" - Time to be careful !

Nasdaq is at 10 year high. Almost all "pundits" on markets are way too optimistic. It's almost feel like 1995-1996 when Fed Chairman at that time Alan Greenspan famously quoted about "Irrational Exuberance" in markets. It was another matter than markets keep on drinking the "new Internet age" cool-aid for another 3 and 1/2 years before bubble burst. Greenspan was 3 years earlier in his prediction. One of the reason was his own policies at fed which caused this bubble. IMO we are seeing similar signs of "Irrational Exuberance" in markets at least for last few weeks. However it is not clear if this would go on for another month, year or week. To be frank, at this time, I cannot predict short-term move by markets. Markets can be insane longer than one think (both on upside and downside) !
Here are the reasons I feel markets are due for correction:

  • Geo-political risks in Middle-east which could cause oil to jump
  • European debt problem - two (Ireland and Greece) have been handled for short-term. Now it's Portugal's turn
  • Inflation rising not only in emerging countries but also in developed countries like UK. Even in US, it is inching towards 2%
  • China's rate increases to slow down its economy
  • Upcoming end of QEII (it could come earlier than currently anticipated by markets) and eventual Fed rate increases (most likely in Q3 of this year)
  • Stubbornly high unemployment rate in US (would be between 8-9% in 2011)
  • Year-over-year comparisons for earnings becoming difficult in starting in Apr earnings season
Normally "smart money" start anticipating all these events 3-6 months in advance and start positioning their bets accordingly. So what should average investor like us do ?

Here are some tips:
  • Follow Warren Buffet's two rules:
    1. Never lose money 
    2. Never forget first rule
  • Protect your gains
    1. Sell them and sit on cash or
    2. Sell "in-money" covered calls
    3. Buy downside risk protection by buying "puts"
  • Stop paying attention to markets so it won't bother if they down from here: If you can tolerate upcoming "volatility", then sit tight because markets would eventually end higher for 2011 (S&P around 1400)

So if markets are in "irrational exuberance", are there any stocks worth buying ? There are always "value" stocks in any market. Here are few to watch out - mostly based on demographic shifts in US

  • FVE ($6.7)
  • SRZ ($8)
  • AMED ($34)
  • SEM ($7)
Have a great President's Day Weekend !

/Shyam


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