No particular point to this post - just thinking out loud. As a warning, the best way to make a million dollars with my investment advice is to start with 2 million. I know others are in the same boat so perhaps this is just commiseration
This is an odd stock market. To me, and to many others, stock price increases have outpaced the economic recovery, and are being driven now in large part by huge injections of printed money by the Fed via ongoing quantitative easing.
First and foremost, quantitative easing has been a savior for bank income statements. Much of the new money ends up in banks, which shows up as increasing excess deposits. Even at fractional interest rates, a trillion dollars of new deposits does wonders for bank profitability. It's an odd sort of bank bailout, cheap if someday the Fed can unwind its balance sheet gracefully, very expensive if not.
Second, though, this money has also found its way into the securities markets, inflating what many people fear may be a bubble in equity and bond prices (and perhaps even into a newly-reignited bubble in real estate, as house flippers again make their presence felt in California and Arizona home markets). I have a friend at a party the other night who shook his head in remorse that he had missed the recent run-up in equity prices. But, unlike many personal investors, he is too smart to jump in now.
I have stayed in the market, though at a reduced mix of my assets, having been convinced by others that you don't fight the Fed and as long as the Fed was injecting money into the financial markets, that security prices would rise almost irregardless of the fundamentals.
Which raises this problem: I am as certain as one can be in such things that in the next 6-12 months the stock market will be lower, at least 10-20% lower, than it is today. I am also fairly certain there is some positive run left before the bubble deflates (you can see that today -- the market is up about a percent as I write this). So I stay in, ready to skedaddle at a moments notice.
My fear is that almost everyone in the market has the same plan, so that the skedaddling will happen so quickly and so in mass that it will be hard for me as a casual investor to stay ahead of it. As a result I am slowly liquidating, willing at some point to just miss out on the last stages of the bubble.
The real question is liquidate into what? Bonds are perhaps more overvalued than stocks, so I certainly tend to stay away from long-duration bonds and bonds that have enjoyed a big run up, such as high-yields, which are trading at some ridiculously small premium to government bonds. I would not invest in Europe right now at the point of a gun, and I have been anticipating a bursting of the China bubble for a couple of years now. Commodities are always a crap shoot -- gold is falling and if OPEC does not act soon oil will be falling soon too. Right now I have decided to sit for a while in short duration bonds, checking my greed at the door and accepting a low return.