Good post ....well constructed and reasoned. I've been in the markets 20 years and full-time trading for a living for over 4 years. I'm basically a fundamental investor who looks for undervalued companies for longer-term investments and then I trade them as well short-term with shares and CFDs.
Yes the market is getting high, and commodities in particular seem to be in a blow-off trend. I picked this resources boom in 2002 and have done well from it .. and everything I read still convinces me that the reources boom has some time to go yet. A correction would be a good thing ... and it would be quickly followed by a rebound IMHO. We are in a period of synchronised global growth and Australia is benefiting from a resources boom similar to when Japan grew rapidly in the 1960s. China is not going to stop growing for many years. Resources booms generally last between 10 and 20 years!!!!
Like you I became "nervous" of staying fully exposed to the markets last October when we did have a correction and withdrew largely to cash. What has happened since then is that the resources boom has gathered momentum and I have missed a good deal of that rise by being largely sidelined.
Its a reasonable strategy to stand aside to protect profits. I agree that from here on the risks have increased and to stay in the market fully is a gamble to some extent. But it depends on your investment timeframe. If short-term .. fair enough stand aside. If longer-term then perhaps what I would advise is tyo take prt profits and stay partly exposed to the upside as well.... that's what I've done.
Several very good economic commentators are saying that "fair-value" for the Australian market is somewhere between 5700 and 6200 on the XJO. I respect their oppinion and by and large agree with their analysis that P/Es at around 16.5 currently are not yet at the "significantly overvalued" stage (over 18) that characterises the final stages of a bull market.
My strategy has been to increase my cash holdings but stay exposed to some extent and if we get to over 5700 I will then be standing aside.... that will be close enough to the likley top for me.
One thing I would NOT be doing is to be SHORTING the XJO!!! Maybe for a very short-term play as today's action seemed overdone .. but otherwise I reckon this is not the time to be "guessing" where the top is. A better strategy (lower risk) would be to let the market tell you where its going .. and once it conclusively turns down then short.
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