Is this a Market Top? What Will You Do?

You might have noticed the general market represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is trading in a sideways channel between roughly $185 and $209.

SPY technical chart May 2016

In fact, Financial Visualization’s daily chart marks a double top, which technically means it’s going down from here. There’s a strong support at $180, but if it falls through that, there will be more downside.

SPY finviz chart May 2016

OK, so all of this is like reading tea leaves. How does the market look fundamentally?

The broad market index itself trades at a multiple of 17.3 while it normally trades at a multiple 18.9. So, the market isn’t excessively overvalued, but it’s not cheap either. Adding that earnings per share was flat in 2015 and is expected to grow 1% in 2016, perhaps the multiple shouldn’t be worth so high.

SPY fundamental analysis graph May 2016

If there are only a select few companies you’re willing to buy, it usually means the market is on the high end.

What if this is the market top? What will you do?

Now, no one knows for sure when the market tops. It’s only clear in hindsight. Chances are some widespread problem like the financial crisis of 2008-2009 will occur sometime in the future to bring down the market. And it’ll have nothing to do with the technicals or fundamentals I discussed above.

However, the charts bring out the topic of what should an investor do to be prudent.

Looking at what the Oracle of Omaha does, Berkshire Hathaway Inc.’s (NYSE:BRK.A)(NYSE:BRK.B) cash and cash equivalents was $58.3 billion at the end of March.

The company’s cash position was down 18.7% from $71.7 billion at the end of the year because of the Precision Castparts Corp. acquisition in January and the Duracell Co. acquisition from Procter & Gamble Co (NYSE:PG) in February.

Hold lots of cash

Cash also helps lower volatility in a portfolio and can do wonders in a down market. By holding a larger than normal cash position when the market is high, investors can buy when interested companies fall and trades at discounts

How to raise cash

One way to raise cash is by selling partial or full positions in overvalued holdings. For example, I recently sold out of my The Coca-Cola Co (NYSE:KO) position when it was trading above $46 per share at a multiple of 23.3 which was last seen in November 2007.

If there’s little to no margin of safety for a holding, and depending on how much it yields, I might sell to preserve capital. Since Coca-Cola is too expensive in my view (as well as having slower growth going forward), I sold.

However, other investors might argue to never sell quality companies even when they’re expensive. So, it comes down to your strategy and execution.

Other ways to raise cash is just to simply hold on to your quality dividend stocks and collect the dividends. Among my highest income generators are real estate investment trusts (REITs) and utilities that pay juicy yields.

Unfortunately, not many REITs are cheap today. Northview Apartment REIT (TSX:NVU.UN) is an exception, though. Because of its 22% net operating income exposure to resource regions, the REIT is trading at a significant discount to its net asset value.

At $20.60 per unit, Northview trades at a discount of almost 28% from its normal multiple. And it yields 7.9% with a sustainable payout ratio of about 70%. All the utilities I own are fully valued in my view.

Other than collecting dividends and potentially selling overvalued shares, you can also save a portion of your paycheque to raise cash.

What are your thoughts?

  • Do you think this is a market top?
  • How are you managing your portfolio? Are you taking an offensive or defensive stance?

Stock Investing Books

Here are some stock investing books that readers find useful:

If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.

Disclosure: At the time of writing, I own TSX:NVU.UN.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

Get Exclusive Articles from me on Seeking Alpha

  • Access my portfolio of high-quality U.S. and Canadian dividend stocks.
  • Real-time updates of when I buy or sell from this portfolio.
  • Get best ideas of the top 3 dividend stocks from my watchlist. Updated each month.
Learn More