How To Keep Your ‘Exuberance’ In Check

As the economy continues to show signs of stability, stocks and exchange traded funds (ETFs) have rebounded nicely since March, enticing even fearful investors back into the markets, lest they miss the rebound.

There are plenty of reasons for investors to be exuberant about the markets.  The New York Times BreakingViews column states that while it’s key not to get stuck in a “crisis mentality,” it’s also important not to get overly exuberant, especially prematurely. Why? We’re still working our way to middle ground:

• The risk premiums over Treasury yields on junk bonds are about 8%, about what they were before Lehman Brothers collapsed, but still larger than their 2007 bull market levels
• The VIX (^VIX) has retreated, but it’s still far off its lows

Obviously, there’s still a ways to go in terms of a full market and economic recovery:

• The bread and butter of the U.S. economy is consumer spending, which is directly related to the labor markets. In order for consumer spending to increase, labor markets must stabilize and then begin improving.
• There are hoards of cash that the government has poured into the economy, which could lead to an inflation environment and a continued weakening of the dollar.
• Lastly, some believe that their are still weak links in the banking sector, which could further add to instability in the financial markets.

It is impossible for anyone to accurately predict the future 100% of the time. To keep your exuberance about this rally in check, have a strategy that includes watching the trend lines, and have an exit strategy to help stop the bleeding, if it comes down to it. Read The ETF Trend Following Playbook for ideas on how to do this.

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